Pooled investments
A pooled (or collective) investment is where lots of people put their money into a fund, which is then invested in one or more asset classes by a fund manager. They are sometimes called collective investments. The main benefits of pooled investments are:
- Professional expertise – you arrange for an investment expert to pick investments for you, to watch those investments daily and judge when to sell them.
- Spreading your risk – even if you have a small amount to invest, you can spread your money across a wide range of investments. You reduce the impact on your investment if, say, one company performs badly. Pooled investments will invest in one or more asset class.
- Reduced dealing costs – if you want to buy a range of different investments directly, you might only be able to invest a small sum in each. This means dealing costs could eat into your profits. By pooling your money, you make savings because of bulk buying.
- Less administration – the fund manager handles the buying, selling and collecting of dividends and income for you. They also deal with foreign stock exchanges and brokers, which can be tricky and time consuming.
- Choice – there is a very wide choice of funds so that you can pick one – or many – that suit you individually.
There are several types of pooled investment but the main ones are:
Investment strategy
Most pooled investment funds are actively managed. The fund manager researches the market and buys and sells assets to try and provide a good return for investors.
Trackers, on the other hand, are passively managed – they simply aim to track the market in which they are invested. For example, a FTSE100 tracker would aim to replicate the movement of the FTSE100 (the index of the largest 100 UK companies). They might do this by buying the equivalent proportion of all the shares in the index.
For technical reasons the return is rarely identical to the index, in particular because charges need to be deducted.
Trackers tend to have lower charges than actively-managed funds. This is because a fund manager running an actively-managed fund is paid to invest so as to do better than the index (beat the market) or to generate a steadier return for investors than tracking the index would achieve. Of course the fund manager could make the wrong decisions and under-perform the market. And there is no guarantee that an actively-managed fund that performs well in one year will continue to do so. Past performance is no guarantee of future returns.
Trackers do not beat or under-perform the market (except as already noted), but they are not necessarily less risky than actively-managed funds invested in the same asset class.
Open-ended investment funds, life assurance investments and investment trusts can all be trackers.