Securities unit trusts

The most popular investment vehicle for individuals is the securities unit trust (SUT). The structure of a SUT is straightforward (see Figure 12). Put simply, the SUT issues PIs (units) (say 100 000) to investors at a price (say LCC 100 per unit) and with the funds purchases the listed shares, bank deposits etc to the value of the total funds available (LCC 10 000 000). If the value of the shares, etc. increases to LCC 12 000 000 (which is easily measured because the instruments are listed) a month later, each PI (unit) is now worth LCC 120 (minus the costs of managing the SUT).

There is a wide variety of SUTs; the broad categories are:

- Asset allocation flexible funds

- Asset allocation prudential high equity funds

- Asset allocation prudential low equity funds

- Asset allocation prudential medium equity funds

- Asset allocation targeted absolute return funds

- Equity value funds

- Equity financial and industrial funds

- Equity financial sector funds

- Equity general funds

- Equity growth funds

- Equity industrial funds

- Equity large cap funds

- Equity resources and basic industrial funds

- Equity smaller companies funds

- Equity varied specialist funds

- Fixed interest bond funds

- Fixed interest income funds

- Fixed interest money market funds

- Fixed interest varied specialist funds

- Foreign equity general funds

- Foreign equity varied specialist funds

- Foreign fixed interest bond funds

- Foreign fixed interest varied specialist funds

- Foreign asset allocation flexible funds

- Real estate (see below)

- Worldwide asset allocation flex funds

- Worldwide equity varied specialist funds

- Worldwide equity technology funds

operational structure of securities unit trust (SUT)

Figure 12: operational structure of securities unit trust (SUT)

Within all or some of the categories there are:

- Specific SUTs.

- Funds of funds (FoFs) (SUTs that are comprised of other SUTs).

- Multi-managed funds (multi-managed SUTs - MMSUTs).

- Multi-managed FoFs (comprised of selected MMSUTs).

Property unit trusts

Property unit trusts (PUTs) are similar to SUTs in every respect except (mainly) in the nature of the asset portfolio (property) and the fact that they are listed. The purpose of a PUT is to provide smaller investors easy (i.e. small-amount) access to the property investment market, diversity in the property investment market, and professional management of the portfolio.

Exchange traded funds

An exchange traded fund (ETF), also called a tracker fund, is a fund set up to track a particular index. It is a type of investment company whose investment objective is to achieve the same return as a particular market index. It invests in the securities of companies / government / commodities that are included in a particular market index. This means that the fund has liabilities in the form of PIs (also called shares and securities) which are listed on an exchange, and assets tiff form of the specific shares / fixed-interest securities / commodities that make up the relevant index according to their weightings in the index.

structure of an ETF

Figure 13: structure of an ETF

An investment in a share index ETF is an inexpensive way of gaining exposure to relevant segment of the share market, i.e. exposure is gained without having to purchase the individual shares that make up the index. Dividends are also payable to the holders of the shares of the ETF. The structure of an ETF is shown in Figure 13.

It may be useful to present a few foreign definitions / explanations of ETFs; The US Securities and Exchange Commission (SEC - the watchdog of the US securities industry) defines an ETF as:

".. .a type of investment company whose investment objective is to achieve the same return as a particular market index. An ETF is similar to an index fund in that it will primarily invest in the securities of companies that are included in a selected market index. An ETF will invest in either all of the securities or a representative sample of the securities included in the index. For example, one type of ETF, known as Spiders or SPDRs, invests in all of the stocks contained in the S&P 500 Composite Stock Price Index."

The American Stock Exchange (Amex):

"Exchange Traded Fund(s): are open-ended registered investment companies...which have received certain exceptive relief from the SEC to allow secondary market trading in the ETF shares. ETFs are index-based products, in that each ETF holds a portfolio of securities that is intended to provide investment results that, before fees and expenses, generally correspond to the price and yield performance of the underlying benchmark index."

Examples of ETFs in the US are shown in Table 4.


Share ETFs

Broad market ETFs

Russell 3000

Wilshire 5000

Major index-tracking ETFs

Dow Jones Industrial Average

S&P 500

Market sector ETFs

US domestic sectors

Dow Jones US Financial

Dow Jones US Industrial

Global sectors

S&P International Industrial

International Technology

Style ETFs

Large-cap ETFs

Russell 1000

Mid-cap ETFs

S&P MidCap 400

Small-cap ETFs

S&P SmallCap 600

International ETFs

Country ETFs

MSCI Australia

Regional ETFs

S&P Europe 350

International theme ETFs

MSCI Emerging Markets

Commodity ETFs

Agricultural ETFs

Rogers International Commodity

Energy commodity ETFs

Rogers Energy

Industrial commodity ETFs

Dow Jones-AIG Copper

Precious metals ETFs

COMEX Gold Trust

Bond ETFs

Barclays 7-10 Year Treasury

Real estate ETFs

Dow Jones US Real Estate

Leveraged & short ETFs

Short ETFs

Short Dow 30

Leveraged ETFs

Ultra NASDAQ-100

Leveraged short ETFs

Dow 30 ProShares

Table 4: Examples of US ETFs

Private equity funds

Private equity fund (PEF) means a pool of funds that is available for investment in or are already invested in unlisted companies. The motivation for the formation of PEFs is usually to provide funding for entrepreneurial-type businesses that are highly regarded and to profit from the listing of these unlisted companies at some stage in the future. This institution is mentioned here for the sake of completeness. Individuals rarely invest in PEFs.

Private equity has become a separate asset class (some would say "becoming"), and in most countries where private equity funds exist so do industry associations. Private equity is associated with venture capital in that venture capital is seen as a form of private equity (start-up capital for the smaller companies). In most (if not all) cases the industry associations include this term. For example, the South African industry association is called the South African Venture Capital and Private Equity Association (SAVCA), the European one is named European Private Equity and Venture Capital Association (EVCA), the Italian one is called Italian Private Equity and Venture Capital Association (AIFI), and so on.

It should be evident that private equity funds are akin to investment companies on the liability side of their balance sheets, whereas their assets are comprised of investments in non-listed companies only, as opposed to investments in listed shares and other investments such as bonds and money market instruments in the case of CISs.

Hedge funds

A hedge fund (HF) is akin to a pooled fund such a unit trust and a retirement fund in that it takes in funds from investors and invests the funds on behalf of them in financial assets. However, it differs in that it has: less of the statutory limitations of the other collective investment schemes (i.e. pooled funds), a large relatively proportion of funds taken in is forthcoming from the management company and the fund managers and, apart from being a "normal" investment vehicle (i.e. a "long only" investment vehicle), it is able to:

- Use leverage (i.e. borrow funds - apart from the funds of investors).

- Go "short" of securities.

- Engage in derivative transactions.

This institution is mentioned here for the sake of completeness. Individuals rarely invest in HFs.

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