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Which investment? Choosing the right one can be tricky! 

Wealth products range from a vast array of Investment Funds (including Unit Trusts, Investment Trusts, Exchange Traded Funds and Hedge Funds) to Bonds, Equities (shares), Property and basically anything else that generates monetary wealth.

Of course will wealth being a very subjective term different wealth brackets (bulges) have different types of wealth products available to them.

A family wealth office is a world away from having a small amount to invest.

A unifying factor is the ideas you take on.

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Which Investment? – Investment Funds

Unit Trusts or Open Ended Investment Collectives (OEICS) – These provide a way of pooling your funds together with other investors.

These types of fund have a ‘Net Asset Value’ or ‘NAV’ associated with them which is a bit like their share price.

Being able to benefit from diversification across assets and geographical areas is an attraction of such investments.

On the other hand, so called ‘closed funds’ such as ‘Investment trusts’ behave much like individual shares do. 

They have a set number of shares available and much like Unit Trusts or OEICs can invest into a wide range of sectors, assets and geographical areas.

However, unlike OEICs, investment trusts can operate with a high degree of ‘leverage’ or ‘gearing’ which can make them more ‘risky’ than their open ended counterparts. 

Exchange Traded Funds (ETFs) are a lower cost type of investment fund and similarity to ‘stock’ like investments. Ishares are a good example of ETFs and offer a very wide range of investment options.

Hedge Funds have increasingly been used to generate ‘alpha’ which is an industry term for returns.

Hedge funds are more risky than the other types of investment funds and the costs associated with them are higher. Being less tightly regulated means that higher levels of ‘gearing’ and ‘risk taking’ are a feature.

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Terminology can be a little confusing and Mutual Funds is a much more commonly used term in the US. A mutual fund can encapsulate all those types of fund mentioned above.

In a nutshell investors use funds because of four distinct advantages they offer over investing in individual securities.

  • Professional Management
  • Diversification
  • Affordability 
  • Liquidity

An easy and concise way of thinking about the type of funds available is to group them as below:

Equity Funds

– Actively managed (Reaching for higher returns than passively managed)

– Passive funds (usually market/index trackers)

– Global, Regional, Single Country or Investment Themes? (with applicable levels of risk)

Multi Asset Funds

Complex risk management and overcoming investment challenges by adding value in areas such as 

 – strategic asset allocation

– tactical asset allocation

– manager and strategy research

Fixed Income Funds

-UK Fixed Income

– Emerging Markets Fixed Income

-European Fixed Income

-Global Fixed Income

– US Fixed Income

Alternative Funds

There are thousands and thousands of funds to choose from.

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Which Investment? – Bonds

Bonds are issued by governments and companies (gilts or corporate bonds) and essentially you lend money to the bond issuer on the basis that you are provided with a return (known as the coupon or interest) and that you can redeem your bonds at a later date. 

Ratings agencies are responsible for ‘grading’ bonds and the ‘higher’ the rating attributed to a bond the ‘safer’ it should be.

Ratings are the only way for an investor to ‘judge’ the worthiness of a bond issuer (like a company) but the risk is always there that a ratings agency gets it wrong (as has happened often in the past). 

Government bonds are a safer investment than a corporate bond but will not offer returns that are as high.

Likewise, government bonds issued by ‘emerging market’ governments will pay ‘more’ but the risk is higher. 

Up until the seismic shocks that reverberated around the world following the 2008/2009 financial crisis bonds (especially government bonds) were viewed as very safe.

These days the risk of ‘default’ must always be at the forefront of an investor’s mind.

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Wealth Products – Structured Products

A structured product/investment are also known as hybrid products.

They are a combination of a ‘note’ which usually means a bond investment and this is combined with a derivative product called an ‘option’.

Commonly referred to as ‘structured notes’ this type of investment usually offers complete capital protection or partial capital protection.

A simple way of visualising this type of investment is to think that the bulk of your investment is invested into a relatively ‘safe’ bond type investment.

Of course there are always risks with an investment and a bond is not any different but the remaining amount of your investment will be put to use with the option.

This increases the opportunity for greater returns but also increases risks.

A significant risk of a structured note investment is that redemption is necessary before the end of the investment period or that the issuer of the bond defaults. 

 

Money Market Funds

Money market funds are low-risk investments that provide you with a safe place to hold rather than grow your savings, while still earning you interest.

These types of funds invest in ‘short term’ corporate bonds, commercial paper (unsecured short term debt) and overnight bank deposits. 

These are all money market instruments that offer a return paid as interest. 

Compared to funds that invest in bonds (for the longer term) and shares, a money market fund will offer a much lower potential return — the benefit of this is a much lower risk.

As a place to hold your money until longer term investment decisions are made a money market fund can provide certainty and peace of mind.

That being said, low risk isn’t the same as no risk. It’s still a type of investment and as such the value could decrease and you may get back less than you originally invest.

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Equities (Shares)

Investing directly into individual shares is a risky business but the rewarding satisfactions is well worth it – as long as you invest in the right ones!

Which Investment? Private Equity Funds

Moving up the risk ladder, one can find wealth management products like Private Equity Funds that offer higher rewards and higher risks.

These are funds that are usually structured to operate as Limited Liability Partnerships (LLPs), and are created by drawing funds from a pool of private investors (wealth holders), and managed by professional private equity fund managers.

Private Equity Funds usually invest in projects conceived by other companies (debt financing), or provide capital (seed money) for new start-up ventures.

Since the risks from such projects are often high, the Fund charges higher (than ‘normal’) interest/profit / returns from the borrower.

These returns are then passed on to the fund investors proportionally. Typically, the LLP has a fixed life – usually 10 years – but may be extended further depending on the founding charter.

Wealth Products – Fees and Costs

Fees and costs can include advice fees, management fees, custody costs and transaction fees.

These will vary from provider to provider and depend on the type of wealth product.

Broadly, investment funds such as Investment Trusts, OEICs and ETFs will cost in the region of 2.5%-4% 

Investing into various bond investments up to 3%.

Structured products can cost up to 4-5% and usually have a minimum investment of £100,000.

Investing individual shares and ETF usually a tiered approach I.E. 

Up to £100,000 fee of 0.45%

£100,000 to £499,000 0.37%

Over £500,000 – 0.20%

There may also be minimum trading commission of around £50-£100.

As mentioned above wealth management companies also charge a fee for holding your funds!

This is often referred to as a ‘custody’ fee and is around 0.5%P.A but billed on a  monthly basis.

At the lower end of the wealth spectrum for those with less available to invest may come across the term ‘platform charges’. 

If you would like a charge analysis contact today!

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