What makes investment companies different?

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What makes investment companies different?

Click here to access the comparison of investment companies
Click here to return to the section Investment companies versus open funds
Click here to return to Investment Companies – Part One
Click here to return to Investment Companies – Part Two

Investment companies have a fixed pool of assets that is unaffected by the buying and selling of their shares. Open-end funds such as mutual funds, OEICs, and UCITS expand and contract as investors buy and sell their shares.

Independent advice

Every investment company has a board whose job it is to look after your interests. Almost all of these boards are independent of the fund manager and can therefore exert pressure to reduce operating costs and keep the manager on track, or even replace it.

you have a vote

As a shareholder, you have a say in the management of your business. You can vote on important issues. You can attend shareholder meetings such as Annual General Meetings (AGMs) and ask questions.

Liquidity

Open-end fund managers need to be able to quickly turn their investments into cash if investors decide they want their money back. Closed-end funds such as investment companies have a more stable base because the number of shares outstanding is usually fixed. With the freedom to not worry about short-term cash flow, investment firms have more freedom to invest in assets that cannot be sold quickly like real estate and private equity. The board of directors of an investment company can choose to issue new shares or to buy them back but, because this is optional, it can also take a real long-term view of the interest of a investment. Investment firms can also operate with low levels of cash and can even borrow money to invest, which improves performance when returns exceed borrowing costs.

Net asset values

Investment companies publish net asset values. The frequency usually depends on how easily an evaluation exercise can take place. Net asset value (NAV) is the value of all of the company’s investments, including cash, less the value of any money it owes, and is usually expressed as a number per share. This is the same calculation used to determine the price of an open-ended fund.

Discounts and bonuses

The value of shares in an investment company is largely determined by supply and demand. If there are more shares than people want to buy, the price normally drops. If there is a demand for more shares than are available, the price tends to rise. In either case, the stock price is likely to settle at a level where supply and demand match. This means that the share price may be lower than the net asset value – a discount – or higher than the net asset value – a premium.

Gear

Investment companies can borrow money. This is often called gearing or leverage because, much like the gears on a bicycle, it multiplies effort. For investment companies, gearing exaggerates performance. This is a two-way street, however, as gearing can amplify losses and improve returns. In general, gearing adds risk. Most investment firms use gearing sparingly, and many don’t use it at all.

Click here to access the comparison of investment companies
Click here to return to the section Investment companies versus open funds
Click here to return to Investment Companies – Part One
Click here to return to Investment Companies – Part Two

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