Introduction to
Investment Funds

There are three main ways of doing it:

• Shares offer you a way of owning a direct stake in a company - also known as equities. Their value rises and falls in line with a number of factors which might include the company’s performance or outlook, investor sentiment, and general market conditions. The first way to invest in shares is to open your own account with a stockbroker and run your own portfolio. Investment theory suggests that you should invest in an absolute minimum of 16 companies although it is thought that around 30 companies is the most efficient. If you go down this route, you need to work out how you will select the companies and when you will buy and sell; this requires skill but also you need to be able to dedicate a lot of time to it. Within your choice of stocks, you may want to consider investing in a number of different sectors and consider if the companies provide any geographical diversification. This can be by buying shares in foreign companies or domestic companies that generate revenue/profits from other countries.

• The second approach is to get a wealth manager to manage a portfolio of shares for you. There may be barriers to entry with a high minimum investment and you will have to pay a management fee that may be higher than investing in a fund. Additionally, if you are a UK taxpayer, you will be subject to Capital Gains tax on profits taken in the portfolio.

• The most popular type of investments is investment funds (known as indirect investment) where your money is pooled with other investors and spread across a variety of different investments. This provides diversification which helps to spread risk and can reduce costs. Additionally, if you are a UK taxpayer, you will be subject to Capital Gains Tax on profits when you sell your holding and you may be subject to income tax on any distributions you receive but importantly the fund itself is not taxed on profits.

Open-ended investment companies (OEICs) and unit trusts

These are funds managed by a professional investment manager. There are lots of different strategies and risk levels to choose from and they can invest in one or more different asset classes. Units or shares in the fund can be bought and sold on any business day based on the net asset value of the fund.

Investment trusts

Investment trusts are companies quoted on the stock exchange whose business is managing an investment fund, investing in shares and/or other types of investment. Shares in the investment trust fund can be bought and sold on any business day through a stockbroker but the price is less transparent and is based on supply and demand and may be higher or lower than a price based on the net asset value of the fund.

Tracker (passive) funds and actively managed funds

Some investment funds adopt a ‘tracker’ or passive strategy. The value of the fund increases or decreases in line with a stock market index (a measure of how well the stock market is doing). Tracker funds generally have lower charges than other types of funds.

Active funds aim to out-perform relative to the stock market index in both rising and falling markets. Active managers will select a number of shares from the index and will generally change their selection as time goes aiming to invest in the best available companies at all times. In falling markets, active managers will try to select companies that will fall less in value than the wider market.

Active funds generally charge a higher management fee.Investors should check that active funds genuinely differentiate themselves from passive funds.

Long-only and absolute return funds

Traditional “long-only” funds are dedicated to investment in company shares. This means that they will generally be fully invested in shares and will only hold a small percentage of cash. When markets are not performing well, they may increase their cash to give less exposure to falling markets to reduce the downside. Nonetheless, they will still hold the majority of the portfolio in shares and their value will normally fall.

Absolute return funds are more akin to hedge funds. Their objective is to try to make a positive return whether markets are rising or falling.They aim to do this by holding shares (“long”) positions but also by using derivatives to hold negative or “short” positions which profit from falling prices. This combination means that they will often perform better than long-only funds in falling markets but in rising markets they are likely to have lower long exposure and will profit less from the upside.

There is no guarantee of how your investment will perform even if you hold it for the recommended minimum of 5 years. In the case of company shares, it depends on the companies’ performance and the economic outlook.

With funds investing in company shares, the chance of losing money or making good profits depends not only on the markets but also on the skills of the team that is managing the fund.

Real investment returns (% pa)

Source: FTSE, Bloomberg, Refinitiv Eikon, Barclays Research

The chart above breaks down real asset returns for consecutive 10-year intervals. UK equities outperformed gilts over the past decade, with an average annualised real return of c.2.6% compared to the gilt return of -3.3%. Weak 2022 performance depressed returns for the decade across both equities and gilts. Elsewhere, real returns to cash over the past decade were exceptionally poor by long-term historic standards.

The chart demonstrates the power of investing in equities over the longer term. Nonetheless, potential investors must be aware that past performance is not a guide to future performance.

Unlike shares which are normally traded throughout the day on a stock exchange, funds are usually traded once a day via the administrator. Funds have a daily ‘valuation point’, which is normally at 12 noon in the UK. The administrator calculates the value of the fund as at the valuation point and hence the price per share and this is the price at which shares are bought and sold. Investors have to ensure that orders to buy or sell shares in the fund are received by the administrator/platform by the deal cut-off point which is before the valuation point. You won’t know what price you’ll buy or sell at until later in the day when the prices have been calculated and published.

If you invest in a fund, you’ll pay an ongoing charge to the company managing the fund. This is referred to as the Ongoing Charges Figure (OCF). It’s shown as an annual percentage but is calculated daily and factored into the price of the fund.

In rare cases funds also carry a performance fee, paid to the manager if certain targets are met.

You can find full details of a fund’s charges in the Key Investor Information Document (KIID). The introduction of the OCF allows investors to directly compare costs among different funds.

Fund fees and charges can be a significant factor reducing the value of your investment over time.

Despite the introduction of the OCF, investors need to consider the other costs and charges that may apply. Investment platforms are convenient ways of investing, but investors should consider the overall costs which may include a further annual charge and dealing charges for each purchase and sale.

The WS Blue Whale Growth Fund is an actively managed fund that invests in global equities. As noted above, equities are viewed as a higher risk investment than cash, fixed income or property. The Blue Whale Growth strategy deliberately runs a concentrated portfolio of equities.

A concentrated portfolio increases your risk with a view to delivering significant outperformance, however, the lack of diversification will hurt more when the strategy underperforms. Investments in equities should be considered over a 5 year time horizon.