Advantages and Disadvantages of Funds and Single Companies
There is a popular misunderstanding of Funds in the case of tax efficient products.
A fund is …
A portfolio is…
A single company is…
When investing into a fund, it is possible that whilst the investment objective has been set, the fund manager hasn’t yet identified the company into which he wants to invest. From this point of view, it may take longer than anticipated to find a suitable business to invest in, with possible adverse tax consequences for the investor. Similarly, if the fund is investing in SPVs, it may well be that the entity has not yet had HMRC advanced assurance and has not yet started trading. It may also decide to invest in only one underlying SPV, consequently a fund may well end up consisting of one hitherto unknown single company. It is important to understand how many companies a fund manager is intending to invest into and what amount he needs to raise to provide sufficient diversification.
When investing into a single company offer, the offer is being made for an identified single company, whose background, business plan and key personnel is known in advance. This can give reassurance to an investor since he can conduct his due diligence to a deeper level on the underlying investee company. In selecting a single company offer, however, it is the investors’ responsibility to chose the offer wisely, whereas in the case of a fund, the investor is trusting the judgement of the manager to make this choice.
One main advantage of selecting a “true” portfolio manager, is that the fund manager may enjoy better bargaining power when acting for investors, enabling them to buy into businesses cheaply. If they have large sums at their disposal, they may also be able to diversify across a number of different underlying businesses with different investment objectives and risk profiles, thereby hedging their bets. The opposite is also true, that an inexperienced fund manager may not have this buying power, may not see the good deals and may not be able to dispose of the available investment into worthy businesses. Indeed, he may not be able to dispose of the investors funds at all with unintended tax consequences for the investor.
Pros and Cons table