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GAZETTE
U n i t L i n k ed F u n ds
Some individuals prefer tomanage
their own investments but it re-
quires time and expertise. Paying
someone to manage your own
personal portfolio could prove very
expensive. A more attractive option
is the investment fund in which
individuals can pool their invest-
ments and jointly hire professional
management.
Such pooled funds are nothing
new. They first became formalised
in Ireland in the guise of insurance
linked funds managed by life
insurance companies. They still
remain the most popular of the
pooled funds but they now face a
lot of competition from other
similar options. Prompted by some
tax changes and the easing of
exchange control, the range of
options has grown rapidly over the
past year. In addition to a growing
number of insurance linked funds,
investors have now a choice of
domestic and overseas based unit
trusts and investment trusts.
There can be no certainty in
choosing the best product. But the
range of choice can be limited by
consideration of tax, personal
attitudes to risk, and some view on
the likely future performance of
various types of investment.
The taxes applied to the various
types of pooled investments differ
- which is best depends on an
individual's circumstances. Some
types of funds carry a higher risk
than others and, even within a
certain category of fund, the risk
element can vary greatly. The
. . choice can be'limited by
consideration of tax, personal
attitudes to risk and . . . likely
future performance
riskier funds may, in fact, perform
better but some investors can not
afford to take that risk and somay
have to be content with a more
certain but potentially smaller
return. And the third element in
making up the choice is a view of
the investment potential of dif-
ferent funds. That must be based
.on a subjective view of investment
trends both at home and abroad.
That includes a view of likely
changes in exchange rates.
It is not easy - few, for instance,
predicated that the IRE would so
quickly move down to 90p sterling
when it was up at 98p recently.
Indeed most commentators were
forecasting a return to parity.
But many investors are able and
willing to take a risk in order to
secure a somewhat greater return
than is available on a deposit
account and they for long re-
cognised the advantages of pooling
their investments with others of like
mind in order to spread the cost of
managing their portfolio. The in-
surance linked funds were for long
the most popular investment
medium. The insurance element
has been very small - so small, in
fact, that many investors in these
By
Colm Rapple
funds possibly do not even realise
that it exists. It is not really there
as a selling point but rather be-
cause it was easier to set up such
funds under the aegis of an
insurance company.
Such unit linked funds are
essentially pooled investments.
Each individual investor's money is
pooled with that of the other in-
vestors and the whole fund is
managed on their behalf by
professional managers. Each
investor has so many shares - or
units - in the fund. The units go
up, or down - in value as the value
of the underlying investments go
up and down.
Irish companies have been
offering a wide range of funds for
many years. There are funds solely
invested in property; others
invested in shares; others in
government funds. Then there are
managed funds with investments
in all of those areas. Within the
category of managed funds there
are some which invest in riskier
ventures than others, thereby
offering the possibility of greater
return but matched with a greater
risk of loss.
And in response to the fears
generated by the 1987 stock mar-
july
/
augu
ST 1990
ket crash there are some funds
which at least guarantee to give
you your money back at the endof
three or five years.
In recent years the bulk of the
funds available to Irish investors
were offered by life insurance
companies. But now the exchange
" . . . exchange controls have
been
eased . . . . [and]
a
growi ng number of foreign
funds are open i ng up for
. . . Irish investors".
controls which made it illegal to
invest in funds abroad have been
eased as we move towards the free
EEC market of post 1992. The
result is that a growing number of
foreign funds are opening up for
investment by Irish investors. Irish
investors can now invest in unit
trusts based abroad and also in
foreign investment trusts. These
investment trusts are basically
companies quoted on the stock
market whose sole function is to
management investment. The
increased competition has caused
Irish companies to take a fresh look
at what they have on offer.
Many insurance companies and
other financial institutions hereare
now offering unit trusts in addition
to the insurance linked funds. They
are similar products but with
essential and important dif-
ferences. But first the similarities.
Both insurance linked funds and
unit trusts are pooled investments
of the type mentioned above. The
bank, insurance company, or other
financial institution simply man-
ages the fund on behalf of the
individual investors each of whom
has so many units in the total fund.
In Ireland the managers generally
charge an annual management fee
and also impose a spread between
"offer" and "bid" prices for the
units. That simply means that at
any one time there is usually a five
per cent spread between the price
at which units are sold to investors
and the price at which they are
bought back from investors want-
ing to cash them in. So if you invest
now and want to cash in in a hour's
time you have lost five per cent of
your money.
Some funds offer units at a dis-
count to large investors while
others operate a smaller spread and
a higher annual management fee.
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