No-one would deny that the current investment fund system is labyrinthine, but here Dr Ian Hunt – a blockchain expert and industry veteran – delineates just how bloated it is and argues it’s time to go fully digital.
Investment funds are the access point to investment for ordinary folk. Those who don’t have the scale of wealth to invest in bespoke portfolios can access the returns available from markets worldwide through collective investment vehicles. Funds are democratising heroes of the investment business.
By pooling resources, small investors can have a piece of the action, just like the big guys. The size of the cash pool achieved by collecting large numbers of small investments together means that it is worthwhile for big-shot investment managers to apply their expertise to the selection of assets for small investors. Blackrock, Vanguard, Schroders, Legal & General, M&G, and the rest, all offer fund products to the masses.
The idea of funds has caught on hugely. Globally, there are now more funds than underlying assets – more collective investment vehicles than all the bonds and equities in the world put together.
The wealth management shop is stacked with funds. Fund platforms act as the shop window for budding, but relatively inexperienced investors to pick among them. A posse of fund distributors ensures that products from multiple investment houses find a channel to market and reach their target investors. Investment houses endlessly court the distributors to ensure that their products reach the widest possible market. An army of financial advisers monitors the profiles and performance of funds, matches them to the needs and ambitions of investors, and advises their clients on what to buy.
A simple UK equity ISA takes up to 16 regulated intermediaries, and a battery of technology platforms, to deliver this basic product
Keeping fund investors safe
Protection for the man and woman in the street comes from extensive regulation.
Regulators are there to ensure that the market is secure, and to protect investors from manipulation, from exploitation and from being mis-sold inappropriate products. Generally, regulators leave experienced and sophisticated investors to make their own decisions, and to safeguard their own interests. However, to protect less hardened retail investors, regulators swing in and sharpen their pens. The mass of regulation in the funds space bears witness to this acute focus: the UK FCAs Collective Investment and Fund Sourcebooks run into hundreds of pages, as do the Ucits regulations. The little guy has protection from a big set of rules.
Funds mitigate investment risk while broadening what the small investor can invest in.
Funds can spread risk by buying into a wide range of assets. From the whole universe of investible assets, different funds give access to different pools and categories of securities. The result is a palette of investment products that give the retail investor a choice of asset classes, geographies, risk levels, return expectations, volatilities and levels of sustainability. Asset classes that would be inaccessible to the ordinary investor become readily investible.
Businesses with focused expertise in different aspects of fund operations ensure that funds are processed with integrity, that the investor is protected from administrative blunders, and that the information provided to the investor is accurate.
Fund accountants ensure that the valuation of each fund’s assets is stated accurately, and consequently protect the investors from fraud.
Fund custodians safekeep the fund’s assets and cash, and so protect the funds and their investors from theft and loss.
An expert investment manager is delegated to manage the assets of the fund in accordance with its investment policies and objectives, and to achieve the best returns for the fund within the risk appetite of the investors.
The fund appoints a broker to facilitate its transactions in the markets in which it is active. The fund’s payment bank handles cash for asset trades, and facilitates payments to and from investors when they subscribe or redeem holdings in the fund.
A regulated entity manages the fund on behalf of its investors, monitors the fund’s adherence to the relevant regulations, and ensures that the fund acts in accordance with its own published prospectus. In the UK, this is the Authorised Corporate Director. In the EU, this may be the ‘ManCo’ or the ‘AIFM’.
Dedicated technology platforms underpin the efficient administration of collective investments.
Fund messaging systems like Calastone and EMX whisk orders speedily and securely from investors and distributors to the funds, and avoid messy and error-prone manual order processes through phone calls, emails and faxes.
Transfer agency systems keep accurate up-to-date records of who owns what fund, so that trades can be settled effectively, and distributions can be made to the right investors. Fund data platforms enable rapid searching for appropriate investments, and make detailed information on the performance and history of funds readily available to the small saver.
