“Unlike in many other financial sectors, where additional regulation is seen as a costly burden, in the collective investment industry the imminent arrival of various new reforms and directives will provide fresh opportunities for investment companies and fund managers to expand and diversify.”

– Sarah Hitchcock, Senior Analyst – Financial Services

In this report we answer the key questions:

Why is the closed-ended sector so much smaller than the open-ended sector?

How will the new EU directive on alternative investment fund managers affect the investment company industry?

What other opportunities lie in wait for investment companies?

Similarly, what opportunities are on the horizon for open-ended fund managers?

In which asset classes will consumers invest their money over the coming year?

Definition:

‘Collective investments’ is a generic term for pooled or managed funds that are divided into units or shares. There are various types, of which the main ones are:

· Unit trust – a trust formed in the UK to manage a portfolio of stock exchange securities, in which small investors can buy units. This gives the small investor access to a diversified portfolio of securities, chosen and managed by professional fund managers, who seek either high capital gains or higher yields, within the parameters of reasonable security. The trustees, usually a commercial bank, are the legal owners of the securities and are responsible for ensuring that managers keep to the terms laid down in the trust deed. Prices of unit trusts are quoted daily, the difference between the bid and offer prices providing a margin for the management and trading costs.

· Open-ended investment company (OEIC) – is similar to a unit trust in that it is an open-ended pooled investment fund, except that it is set up as a company instead of a trust. The first OEICs were launched in the UK in 1997. In 2001, the FSA relaxed the rules governing which types of fund can convert to OEICs and since then, the majority of fund management groups have converted their unit trusts to OEICs or launched these funds. Hence, OEICs are now the dominant type of collective investment.

· Investment trust – a listed company that invests the funds provided by shareholders in a wide variety of securities. It makes its profits from the income and capital gains provided by these securities. The advantages for shareholders are much the same as those with unit trusts, ie spreading the risk of investment and making use of professional managers. Investment trusts are closed-ended funds and have been in existence since 1868.