Investment companies and open-ended funds are often not as wildly different as sometimes imagined.
The investment company may have some additional ‘bells and whistles’ (more of which later). It may hold assets which an open-ended fund cannot access, such as unquoted companies, but closed-ended and open-ended funds are really two sides of the same coin.
In fact, there’s many a high profile unit trust fund manager also managing investment companies, sometimes along similar lines - albeit sometimes with less fanfare.
But they do have important differences. If you put a fund manager on the spot and ask which type of structure they prefer to manage - many manage both types of fund - they’ll usually say that it makes no difference to them.
This rather begs the question: should it matter to advisers, particularly in a post RDR landscape when different types of fund have to be considered alongside each other?
Having said that, push a little further and many fund managers will tend to concede that the closed-ended structure of investment companies can make them a more comfortable vehicle to manage.
What is the closed ended structure?
Investment companies have a closed-ended structure. This means when they are launched as companies, quoted on the stock exchange, there is a fixed stable pool of assets. It follows that for every buyer there must also be a seller.
Open-ended companies have an open-ended structure - new units are created for every buyer and units are redeemed when they are sold. This means they automatically increase and decrease in size according to supply and demand.
Fund managers tend to like the closed-ended investment company structure because it can be something of a comfort blanket during times of market volatility.
It means they do not have to grapple with fluctuations in the size of the fund. There are a fixed number of shares in issue at any one time; managers do not have to worry about selling stock to meet redemptions.
This has contributed to the strong long-term performance of the sector and it is also particularly useful for investment companies investing in illiquid areas. The property investment company sector is a useful illustration.
As an example, during the commercial property downturn at the height of the financial crisis, some property open-ended funds were forced to ‘soft close’ because of the volume of redemptions - property, after all, cannot be sold overnight.
In contrast, whilst investment companies in the property sector experienced sharp falls in their share prices, investors could nevertheless exit if they wanted to.
Equally, opportunistic investors could still buy - and they could do so at knock down prices. Investment company discounts in the property sectors widened considerably during this time and property investment companies have recovered strongly since then.
Flexibility
There is also some flexibility to the closed-ended investment company structure which can help boards and the manager to control supply and demand.
