A pooled investment is an investment where lots of individuals put different amounts of money into a fund (or other collective type of arrangement), which is then invested in one or more asset classes by a fund or investment manager.
Investing in pooled investments can provide a much simpler way of gaining access and exposure to a wide variety of asset classes and global stock markets than if an individual investor attempts to invest directly in these types of assets.
Pooled investments can also be much less risky than investing directly in, for example, the shares of one or two companies. It is important to remember that the value of a pooled investment can fall just as easily and quickly as share prices can.
There are several different types of pooled investments, but the most common ones are open-ended investment funds and investment trusts.
The main benefits of investing via pooled investments are:
- Professional expertise - an expert such as a professional fund manager will select the investments to be held within the pooled arrangement, monitor those investments daily and judge when to sell them.
- Spreading your risk - even if you only have a small sum to invest, you can still manage to spread your money across a wide range of investments by investing in a pooled investment. This will help to reduce the impact on your investment if one company or type of asset performs badly.
- Reduced dealing costs - if you want to buy a range of different investments directly, you might only be able to invest a small sum in each. This would mean that dealing costs (the charges that you would pay for buying the shares, bonds etc) could eat into your profits. By pooling your money with other investors, you benefit from savings made as a result of bulk buying.
- Less administration - the fund manager handles the buying and selling of the underlying investments and collects dividends and income for you. They also deal with the stockbrokers and investment companies, which can be complicated and time consuming.
- Choice - a very wide choice of funds and other types of pooled investments exist (they are often designed to invest in specific asset classes or along the lines of a particular theme), so you can pick one - or several - that suit you.
Open-ended investment funds
Also known as collective investment schemes, these portfolios are run by fund management companies. They are referred to as ‘open-ended’ because the number of units in the fund increases and decreases in relation to the number of investors.
Investors hope that the unit price of the fund will rise over time as the value of the underlying investments increases, as well as possibly benefiting from dividends.
Investment trusts are another type of pooled investment that makes investments in other types of investments. They are companies that investors can buy shares in.
Investment trusts are closed-ended, meaning there will only ever be a set number of shares available to buy. You can either invest a lump sum by buying investment trust shares from a specialist provider or via a financial adviser, or you can invest in them on a regular basis (for example, by making monthly contributions by direct debit).
For investors that want a diversified exposure to a variety of different fund managers, multi-manager investments may be worth considering.
The idea behind these funds is that a multi-manager will buy funds run by a number of other managers, with their choices reflecting the overall aims of the product.
The hope is that by getting access to a wider range of fund management talent, in some cases from around the world, you will get better returns and spread your risk more widely. These types of funds do tend to come at a price that reflects the spread of fund management talent that they allow you to access.
An alternative to the multi-manager approach is to opt to use an investment platform which enables you to buy funds from a range of providers and hold them in one account; effectively working as your own multi-manager.
The range of funds available on different investment platforms (such as those available from Cofunds and Skandia) will vary enormously, but there will often be hundreds of funds to choose from, each with their own theme and objectives.
As all funds held via an investment platform are registered in one account, usually using the internet, investors are able to monitor performance at a glance and switch in and out of different funds in search of the best possible returns.