Suppose today the manager receives inflow of £4m from savers.How many new units created for savers?4m/1.25 = 3.25m.And fund manager buys £4m-worth of additional shares, bondsetc.NB: 2 things
inflow of £4m has led to larger fund
price of units depends entirely on no. of units and value of assets
‘Closed-end mutual fund’Similar to unit trust, buta)the fund is of fixed sizeb)manager is a company (‘plc’) with fixed no. of shares.Investing in an IT involves buying shares in a company whose business is buying andholding shares.Its oldest form of mutual fund. Begun in 1870s. Like UTs they can have variousobjectives, but Its generally more focused on international investment.Current value = c£60m.Access to the fund involves buying existing shares of the company from existingholders.Note:a)flow of funds ‘into’ the fund pushes up share priceb)fund invested is unchanged in size.
Unit and Investment trusts compared
:UTs bigger than ITsDemand for units creates units and enlarges fund, demand for Its merely pushes upshare priceUTs more expensive to run (because every flow of funds requires manager to buy/sellunits)IT performance more volatile (because ITs are companies, they can borrow to invest).IT share values are quoted on share pages of
Preparation for week 8
1.Read the appropriate chapter and make a note of any problems or difficulties2.Learn key words and concepts:General insuranceAnnuityLong-term insuranceEndowmentLife insuranceOpen ended mutual fundMoral hazardClosed end mutual fundDeductible amountBuy-sell spreadRestrictive covenant