Fund Types and Investment Styles

More experienced investors will be well aware of the many attractions of investing through an investment fund, such as

• Ease of administration, including record keeping,  taxation, and often the ability to switch money easily between funds
• Economies of Scale
• Diversification
• Liquidity– the degree of access to your cash
• Access to a much larger range of markets and asset classes
• Professional management

There are a lot of investment funds in which you can invest money.  It can sometimes be difficult to find a difference between them. 

Investment Styles

One area you can look at is investment style.  Below is a brief explanation of some common investment styles in Ireland.

Active or Passive

The passive manager tries to copy the return of a market (for example, the Irish Stock Exchange) or a particular sector of the market (for example, technology shares).  The passive investment manager makes no attempt to do better than the market; they simply try to have the same investment return as the market they are trying to copy.

On the other hand the active fund manager believes that they have the skills and expertise to deliver returns that are above market returns.  Of course delivering returns above that of the market cannot be done without taking more risk.  Generally the active fund will have more ups and downs than the market.

There is a lot of debate as to whether people should invest in active or passively managed funds but like with many things in life there is a middle ground.

The somewhat science fiction sounding “Core/Satellite” structure is sometimes used to combine both passive and active management.  For example, the biggest part of the fund, the “Core”, might be passively managed, trying to copy the investment returns of a specific market.  The small remaining “Satellite” part would then be actively managed, trying to deliver returns that are above the market.

Value Investing

Value investing is perhaps the most widely known stock-picking method due to the fame of Benjamin Graham and Warren Buffett.  The fund manager tries to find companies where they believe the share price is undervalued by the market.  The fund manager hopes to benefit from the increase in the share price when the market realises its worth.

A simple concept in theory, but in practice the assessment of value must always encompass a thorough understanding of how the value is derived.

Growth Investing

Growth investing focusses on growth shares.  These are shares where there is believed to be good prospects for future returns arising from the potential of a company’s earnings to grow.  The idea is that growth in the company’s earnings will drive an increase in the share price.  In general, growth shares are expected to grow quicker than the overall market.  This could be indicated by established patterns of growth in the past combined with the prospect for future returns.  Potential growth can be driven by factors such as sector, geography, asset class, regulation and for cyclical industries, the point in the cycle.

Top Down or Bottom Up Investment

Top down means the manager looks at the market as a big picture all the way down to individual assets.  For example the manager would look at conditions around the world, then look at which sectors to select and then analyse specific stocks to invest in.

The bottom-up manager starts with specific assets.  For example the manager might select a share based on their analysis of that company, regardless of sector or big picture.

Fund Types

There are also a wide range of different types of funds available. Three of the main types of funds are described below.

Specialist Funds

Specialist funds generally invest in one particular asset type in one particular region.  A common example might be an “Irish Equity Fund” which concentrates on Irish shares.  Another example might be a “European Bond Fund” which concentrates on Eurozone bonds.

Balanced Funds

A balanced fund is a fund that invests in a number of traditional asset classes (shares, bonds, property, cash, etc.), currencies, countries and even sectors.  Traditionally balanced funds have also been referred to as “managed funds”.  The traditional managed fund might be 60% invested in shares, 20% in bonds, 15% in property and 5% in cash.

Multi Asset Funds

Similar to balanced funds, multi-asset funds invest in a range of traditional asset classes but they also include some investment in alternative assets.  Fund managers monitor risk and will have access to a range of strategies which aim to manage risk effectively.  A simple example would be a fund where each asset (like property or shares) has a specific weight allocated to it and is regularly ‘rebalanced’ by the fund manager, to make sure those weights, and the risk level of the fund, have not changed.