Equities
Equities are shares in companies, that typically pay a portion of their profits to shareholders as dividends. The shares may be publicly quoted on an exchange such as the London Stock Exchange. There is a secondary market in the UK called AIM (Alternative Investment Market), on which smaller companies may have their shares quoted.
Equities can be bought directly using a stockbroker, and the shares can be held in the form of certificates, or in a Nominee Account, or they can be held electronically in a CREST-sponsored account.
They can also be bought using funds. There are several different types of collective investment funds, which are professionally managed by a fund manager whose objective is to invest the funds for the benefit of the shareholders of the fund. The types of investment funds fall into two types, closed-ended (investment trusts) and open-ended (unit trusts and OEICs).
Closed-ended funds are publicly quoted investment companies, with a fixed number of shares in issue. This means that the price of the shares can fall to a discount to the net asset value of the underlying investments. This can make the shares more volatile than the equivalent open-ended fund. Because the fund administration charges are frequently lower, the performance over the longer term tends to be better than open-ended funds.
Open-ended funds issue shares when new funds are received, and cancel shares when they are redeemed. The share price is normally set daily, and it is more or less equal to the net asset value. There is a much larger range of open-ended funds to choose from than closed-ended ones. In fact, there are more funds available in the UK than there are underlying companies to invest in!
There is an increasingly wide range of passive, or index-tracking, funds available. Exchange Traded Funds (ETFs) are a particularly useful type of passive fund. It is important to make sure these have Distributor status, for tax efficiency in the UK, and it is important to check any counterparty risks.
ETFs offer a low cost way of accessing the major equity markets, as well as corporate and government bonds, commercial property, natural resources (e.g. gold, oil, water, agriculture) and money markets. There is no initial charge and the annual management charge is typically between 0.1% and 0.65%. The shares are freely tradeable, and there are over 500 listed on the London Stock Exchange. As well as ETFs that track an index upwards, there are ETFs that provide the inverse of the index return, allowing you to go short.
There is a new range of leveraged and short ETFs that provide 2x the returns of the underlying index (e.g. FTSE100) based on monthly observation data, in order to reduce the effects of daily volatility. Nevertheless, these are very risky.
The equities portion of a portfolio will normally be split into UK, European, North American, Japanese, and Emerging Markets, in proportions that will vary according to the objectives of the investor. Smaller portfolios will normally be invested in open-ended funds, whereas larger portfolios may include investment trusts, ETFs and individual equities.
There are funds that provide a balanced portfolio, and these are called Managed Funds. There are funds that invest in other funds, and these are called Fund of Funds. Some of them aim to add value by moving between asset classes as the economic climate changes, and these are called Multi-Asset funds. An example of a fund of funds is Jupiter Merlin Income; and a multi-asset fund is M&G Cautious Multi Asset.