Structure of funds

Investment funds are generally structured as either "open-ended" or "closed". These terms refer to the shares or units in the fund that investors can hold. Shares are issued by investment companies and units by funds set up as trusts, hence the term "units trusts". A closed fund has a finite number of shares or units in existence whereas an open-ended fund creates or cancels shares/units as investors look to purchase or sell their holding. The size in terms of the humber of investors and the holding they have of an open-ended fund can therefore increase or decrease depending on the attractiveness of the fund to investors. Unite trust was created under trust law rather than company law. Thus the assets of the fund are held on behalf of the investors by a trustee.

Role of Trustee

The trustee monitors the activites of the investment or fund manager to make certain that the investments are in line with the trust deed. The trustee owns the assets of the fund, not the fund manager and if there are more buyers than sellers of the units in the fund it is the trustee who will, on request by the fund manager, create more units, or the reverse if there are more sellers than buyers.

Trust Deed

The trust deed sets out the terms under which the trust is established and specifies the investment objectives, products and markets permitted, constraints on investments and the amount of risk the fund manager can establish in the portfolio.

Fund Manager

The fund manager is the firm and/or person making the investment decisions. Many large unit trusts are managed by investment companies. Employees working for the company as fund managers deal with particular funds and make decisions based on:

• the trust deed
• the fund management company's view of markets and products
• the asset allocation profile of the fund
• selecting individual assets to be held in the portfolio
• adjusting the assets to reflect market conditions and changes

The fund management company will be responsible for marketing and sales of units in the trusts for which it acts as investment/fund manager for and makes its money by charging fees to investors. These fees are based on an initial fee paid when the units are first purchased and management fees related to the function of the manager in making investment decisions and running the fund.

Some funds are what is called "multi-manager" funds and this can involve more than one management firm being responsible for managing parts of the portfolio. For example manager A may manage equities and manager B fixed income investments within the fund. Equally there could be two managers from different firms managing the equity part of the portfolio on a percentage basis, i.e. fund manager A manages 60% and manager B manages 40%.

Custodian

The trustee may appoint a custodian to hold the assets of the fund in safekeeping and to deal with the settlement of transactions undertaken by the manager.