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Spread the risk by collective action; Simon Patte rson looks at the advanta ges of using colle ctive investments.

THERE are various types of collective investments. The most common are unit trusts, open ended investment companies (OEICs) and investment trusts. These investments enable individuals to pool their money into a fund which is then invested in a wide range of shares (equities), fixed interest stocks (bonds) and even property.

The number of companies and securities invested through a collective should be greater than an average investor could achieve, cost effectively, through a portfolio invested directly in stocks and shares. Collectives can be bought directly from an investment manager or through an independent financial adviser, stockbroker or private client investment manager.

ADVANTAGES OF COLLECTIVES There are several major advantages provided by investing in collectives rather than individual shares. These can be summarised as follows: SPREADING THE RISK In simple terms, if you invest in individual company shares, your investment risk is based on the performance of that company. Should the company fail, the capital you have invested is at risk.

Historically stocks and shares have outperformed cash over longer periods. The more shares you add to a portfolio, the lower the risk will be of one particular share, or industry sector, adversely affecting the whole portfolio. A diversified group of 20 shares should eliminate around 90% of this risk from your portfolio.

Increasing the portfolio size to 50 shares should eliminate nearly 95% of the risk. So using a collective where you are able to obtain a good spread across tens or indeed hundreds of companies helps minimise risk because when an investor invests in a collective, they are effectively buying a stake in a wide range of shares.

REDUCED DEALING COSTS Pooling money with that of other investors allows access to the expertise of professional fund managers and the cost advantages of buying in bulk. An individual investing a small amount in a wide variety of different shares could find dealing costs very high in proportion to the investment amounts.

REDUCED ADMINISTRATION AND EASE OF PERFORMANCE MONITORING If an investor holds many shares directly, there will be a great deal of paperwork involved in buying, selling, collecting dividends, monitoring performance and so on. With a collective investment, it is the role of the fund manager to deal with all these aspects and the investor only has one set of paperwork to consider. It is also simpler to compare performance with similar funds.

CAPITAL GAINS TAX (CGT) ADVANTAGE In the case of directly held shares, each time a share is sold, this crystallises a CGT event. Where gains are made in excess of the annual allowance, CGT would be payable. Should your stockbroker wish to change the composition of your investment portfolio, then CGT may arise. With collectives, however, gains realised on the sale of investments within the fund are exempt from CGT. This allows a collective investment to be actively managed without being restricted by CGT constraints. Your shareholding in the collective will remain unchanged, but the underlying funds will change. CGT may be liable when you sell your holding in the collective.

There are a wide range of collective investments available in the UK, with more than 2,300 funds listed in the Unit Trust and OEIC universe. Each collective will have different investment objectives, risk profiles and different underlying assets held. Collective investments can therefore provide clients with expert management and an opportunity to reduce investment risk through diversification.

For the investor who wishes to concentrate on specific areas more specialist funds are available, although in this instance the benefits of diversification would be diluted. The investor should note, however, that even with the benefit of diversification the value of investments linked to stocks and shares can fall as well as rise.

Taking professional advice is always recommended on selecting the most appropriate collectives, to match your circumstances and objectives. This may include advice on collective investments held within a particular tax wrapper such as your pension or your Isa.

Simon Patterson is a manager in the Investment & Pensions team within Dickinson Dees LLP's Wealth Management team. He is on 0191 279 9651, simon.patters m
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Title Annotation:Features
Publication:The Journal (Newcastle, England)
Date:Dec 12, 2009
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