Open & closed end funds

An investment or 'closed end' trust is a public company whose business is to invest in other companies.

Investors in an open-ended fund give a fund manager their money to invest on a collective basis. The term "open-ended" means that new shares can be issued in accordance with demand for them. When an investor wants to put money into the fund, new shares are issued. When they sell, the shares are "redeemed". The buying and selling price of an open-ended fund always reflects the value of the underlying portfolio (minus any costs involved).

One problem with using open-ended funds to invest in illiquid assets such as commercial property, for example is that if investors demand their money back in large numbers, then the fund will be unable to liquidate its holdings rapidly enough to satisfy redemption requests. This is why many commercial property funds had to halt redemptions during the panic that followed Britain's vote to leave the European Union in 2016.This is not a pleasant experience for investors who rightly expect to be able to access their money as and when they want to.

This is one reason why MoneyWeek prefers to use investment trusts closed-end funds. An investment trust is simply a company whose business is investment. The trust lists on the stock exchange, and then uses the money raised to invest in a portfolio of assets. If an investor wants to invest in the trust, they simply buy the shares from another investor on the open market. As a result, the fund manager is never under pressure to sell out of the underlying portfolio purely to satisfy redemption requests.

This does mean that the share price of an investment trust will often trade at either a discount or a premium to the value of the underlying portfolio. But it also means that you can always get access to your money in a hurry if push comes to shove.

See Tim Bennett's video tutorial: Investing in funds - why we prefer investment trusts.

Recommended

Has passive investing created a stockmarket bubble?
Sponsored

Has passive investing created a stockmarket bubble?

Over the past two decades, investors have been switching from buying actively managed investment funds to buying passive funds that simply track a mar…
28 Sep 2021
Invest in a promising new chapter at RIT Capital Partners
Investment trusts

Invest in a promising new chapter at RIT Capital Partners

The long-standing chairman of the RIT Capital Partners investment trust stepped down in 2019, but the new team are doing very well, says Max King.
27 Sep 2021
The end of the bond bull market, and how to invest for it
Investment strategy

The end of the bond bull market, and how to invest for it

The great bond bull market looks to be over, and you probably don’t want to be holding government bonds, says Merryn Somerset Webb. Here’s what you sh…
21 Sep 2021
Carbon emissions trading: how to profit from the price of pollution
Funds

Carbon emissions trading: how to profit from the price of pollution

Carbon-emission allowances are still an esoteric market, but one that looks set to grow. This new fund could help you cash in.
21 Sep 2021

Most Popular

A nightmare 1970s scenario for investors is edging closer
Investment strategy

A nightmare 1970s scenario for investors is edging closer

Inflation need not be a worry unless it is driven by labour market shortages. Unfortunately, writes macroeconomist Philip Pilkington, that’s exactly w…
17 Sep 2021
What really causes inflation? Here’s what prices since 1970 tell us
Inflation

What really causes inflation? Here’s what prices since 1970 tell us

As UK inflation hits 3.2%, Dominic Frisby compares the cost of living 50 years ago with that of today, and explains how debt drives prices higher.
15 Sep 2021
The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021