Table of Contents
- Pros and Cons of a Pooled Investment Vehicle
a. Negotiating Power
b. Professional Management
a. Management Fee
- Examples of Pooled Investment Vehicle
a. Mutual Funds
b. Exchange-Traded Funds
c. Real Estate Investment Trusts (REITs)
Pooled Investment refers to a group of investors injecting funds into a shared pool to buy shares of an investment product/company. Generally, a pooled investment vehicle is one large portfolio of investment products funded by numerous investors. Investors of these products realise their returns in the form of dividends or interest distributions and/or price appreciation as the investment’s per-share price rises due to market volatility.
Typically, a pooled investment vehicle is managed by a team comprising portfolio managers and analysts. This group of professionals are generally subject matter experts in a certain field or industry, where they assist their investors make decisions on the purchase and sale of securities within the investment portfolio. In return for rendering such a service, investors are required to pay an expense ratio to hold the investment. This ratio reflects the cost of owning the fund on a yearly basis while keeping the interest of portfolio managers and investors aligned.
Pros and Cons of a Pooled Investment Vehicle
When a fund is pooled together from individual investors, it brings access to bigger and more attractive deals. Larger pooled resources enable investors to leverage on a superior negotiating power because they are part of a broader community of buyers.
When investing in a pooled investment vehicle, investors are putting their money under the management of money managers; industry professionals who devote majority of their time researching and understanding various industries. In addition, management fees are usually charged by expense ratio, which keeps the interest of portfolio managers and investors aligned.
Simply put, you have the opportunity to minimise your time commitment that might otherwise be required to conduct a thorough due diligence because your portfolio managers will provide you with timely performance updates and make important investment decisions on your behalf, after consultation with you.
In a pooled investment vehicle, the fund is typically large enough to enable investors to gain access to a broader range of investments than any fund’s individual investors could with lesser funds if they invest individually. A larger pool of funds means the possibility of diversification in various industries, businesses, and asset classes.
One of the downsides of having your money professionally managed is that you are required to pay management fees. These fees sometimes do not come cheap since it is calculated as a ratio to your invested sum. If your investment sum is large, the management fees will generally be more expensive.
Examples of Pooled Investment Vehicle
Mutual Funds, Exchange-Traded Funds (ETFs), Hedge Funds, Closed-End Funds, Real Estate Investment Trusts (REITs), and Unit Investment Trusts (UITs).
A mutual fund is a type of financial vehicle that invests in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are a type of open-ended investment, which means the company that owns the fund can create new shares on demand to sell to investors. The fund also reserves the right to buy back the shares from investors.
Mutual funds can be actively or passively managed by money managers. In actively managed mutual funds, the money managers typically use S&P 500 as the benchmark and try to beat its corresponding returns by actively making decisions about what investments to buy and sell within the fund. Thus, active investing involves taking a hands-on approach by a portfolio manager or some other market participant who makes decisions about where to invest the money in the fund. Portfolio managers use their experience, knowledge, and analysis to make choices about what to buy or sell in the portfolio.
On the other hand, passive investing generally involves investing over the long term with very limited buying and selling within the portfolio. A passively managed mutual fund tracks an index such as S&P 500 or NASDAQ, and attempts to match its performance. Thus, in general, such passively managed funds are not expected to outperform the market, but rather, perform in line with the market. Another notable difference is that actively managed funds are much more expensive than passive funds that track on index. The former usually charge a management fee and a performance fee.
An exchange-traded fund (ETF) is a hybrid of a mutual fund and a company stock. ETFs comprises a portfolio of investments that can include stocks, bonds, real estate and commodities. The difference between a mutual fund and an ETF is that while the price of a mutual fund is set once per day at the close of trading, an ETF is traded throughout the day on the exchange just like any stock. The price of an ETF is influenced by market volatility.
Similar to a mutual fund, as explained above, an ETF can also be passively or actively managed. In an actively managed ETF, money managers will use an index as a benchmark and try to beat the index. Conversely, in a passively managed ETF, fund managers will try to replicate the return of the said index. ETF tends to have a lower expense ratio as compared to mutual funds. For example, SPDR S&P 500 ETF Trust (SPY) is an ETFs that tracks the S&P 500 and is also one of the largest and most heavily-traded ETFs in the world.
Real Estate Investment Trusts (REITs)
In a REIT structure, a company pools money from various investors, including individuals and institutions, and uses the pooled money to purchase several real estates to form a portfolio of properties.
REIT is one of the most popular investment vehicles among investors because it allows investors to invest in real estate in a bite-size form without physically owning a property. A REIT company buys properties to invest in, and investors buy shares of the REIT. REIT also helps investors to diversify because it owns a basket of properties which helps investors to eliminate concentration risks. REITs in Singapore are particularly attractive because of the tax transparency status, where a REIT is allowed to be exempted from tax by IRAS only if 90% or more of its taxable income is distributed to its shareholders in the form of dividends.
REIT structure, Source: Moneysense
Sign Up at RealVantage
RealVantage is a real estate co-investment platform that allows our investors to diversify across markets, overseas properties, sectors and investment strategies.
Visit our main site to find out more!
Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.