Real Assets vs Financial Assets

Study Notes

Open-Ended Investment Companies (OEICs) are a type of investment fund that issues shares, unlike trusts which issue units.
OEICs allow both regular and lump sum investments.
They are managed by an Authorized Corporate Director (ACD).
The board of directors is responsible for overseeing the duty of care.
The depositary, usually a bank, safeguards the assets.
Key pricing features:
- Single price for both buying and selling
- Price not based on supply and demand for shares
OEICs can have a stand-alone or 'umbrella' structure.
OEICs have several key differences from Unit Trusts:
- Pricing: OEICs have one price, Unit Trusts have separate bid and offer prices.
- Governance: OEICs are governed by company law, Unit Trusts by trust law.
- Purchase: OEICs purchase shares, Unit Trusts purchase units.
Exchange Traded Funds (ETFs) are investment funds that:
- Originated from the interest in index funds due to underperformance in mutual funds.
- Index funds mirror markets but trading happens only at the end of the day based on the NAV.
ETFs are open-ended funds:
- Shares are created/canceled based on demand fluctuations.
- They typically track market sectors, styles, regions, or entire markets.
- ETF shares are traded like regular stocks.
ETF pricing:
- Unlike OEICs and Unit Trusts, pricing is determined by the market.
- Shares can trade at slight premiums/discounts to underlying investments.
- Prices fluctuate throughout the trading day.
Benefits of ETFs include:
- Lower costs and potential tax advantages compared to mutual funds.
- A wide range of options, tracking almost any asset class.
Closed-End Funds are listed companies with a fixed number of shares, and they:
- Often invest in various securities like stocks and bonds.
- Have shares that trade at a discount or premium to Net Asset Value (NAV).
Key differences between Closed-End Funds and OEICs/Unit Trusts include:
- Fixed shares vs. open-ended growth
- Potential for discounts/premiums on shares
- Ability to use leverage for enhanced returns (with increased risk)
Returns from Closed-End Funds are primarily driven by alpha with higher dispersion.
REITs and VCTs are specialized types of investment vehicles within Closed-End Funds.
Mutual Funds:
- Returns depend on the market capitalization and the growth/value orientation of the stocks they hold.
- Returns are driven by beta with lower dispersion for traditional investments.
Traditional investments primarily consist of public stocks and bonds, making them highly liquid, correlated to markets, and having passive shareholders.
Alternative investments include:
- Private and public market assets with potential illiquidity.
- Non-traditional methods like short-selling and leverage.
- Active shareholders that own the investments.
Alternative investments returns are primarily driven by alpha with higher dispersion.
Hedge Funds are pooled investment vehicles (like mutual funds) that:
- Register with the SEC but have more freedom in strategies.
- Are not suitable for all investors due to their complexity and risk.
- Have a common fee structure of 2% management fee and 20% of profits.
Private Equity Funds:
- Allow direct investment in private (non-publicly traded) companies.
- Do not register with a regulatory body.
- Classifications include buyout funds and venture capital funds.
- Have a set-up as limited partnerships and use a 2/20 fee structure.
- Have constraints to prevent excessive compensation.