COLLECTIVE INVESTMENT SCHEMES (CIS),
THEIR ROLE, PERFORMANCE AND
CONTRIBUTION TO CAPITAL MARKET
AND ECONOMIC DEVELOPMENT OF
PRESENTED BY: MARY ASARE-YEBOAH
Bsc. (Banking & Finance), MBA (Finance)
WORKSHOP ON SECURITIES MARKET
FOR SELECTED MEDIA PRACTITIONERS
THEME - THE ROLE OF THE SECURITIES
(CAPITAL) MARKET IN WEALTH
CREATION AND NATIONAL
ORGANISER - SECURITIES AND EXCHANGE COMMISSION
PLACE - ERATA HOTEL, EAST LEGON, ACCRA
DATE - THURSDAY, MAY 27, 2004.
THE LEGAL FRAMEWORK
Companies Code, 1963 Act 179
Securities Industry Law 1993 (PNDCL333)
Securities Industry (Amendment) Act, 2000 Act 590
L.I. 1695 Unit Trusts and Mutual Funds Regulations, 2001
Regulatory Body: Securities and Exchange Commission.
WHAT ARE COLLECTIVE INVESTMENT
CIS, as the name implies, is an avenue provided by a company (or persons so
qualified) for the collection funds from a wide range of investors. The funds
collected form a pool which the company invests in a portfolio of securities to
Collective schemes serve as flexible savings vehicle for individuals, corporate
bodies, associations, clubs, etc. to accumulate funds for future needs.
The company that collects the pool of funds from contributors is known as the
Manager. The Manager offers professional management for the funds collected.
The Manager is in a better position to invest the funds on behalf of contributors
for high returns. Returns made from investment are ploughed back into the pool
and distributed to contributors on pro-data basis, i.e. according to each
contributor’s proportion in the Fund.
A Collective Investment Scheme may be a Unit Trust or a Mutual Fund.
WHAT IS A UNIT TRUST?
A “Unit Trust” means any arrangement whereby
securities or any other property, other than a charge
to secure the debentures of one body corporate, are
vested in trustees and the beneficial interest therein
is divided into Units, Sub-Units or other interests by
whatsoever name called with a view to an invitation
being made to the public to acquire such units or
any of them.
WHAT IS A MUTUAL FUND?
Section 142 of PNDCL333 as amended defines a mutual fund to mean
a public or external company incorporated solely to hold and manage
securities or other financial assets and which has made satisfactory
arrangements for ensuring that if:
(a) Any invitation is made to the public to subscribe for its shares
the price at which the shares are offered shall be based on the net
value of its assets at the time of the offer with no addition except for
a reasonable service charge subject to a proviso in section 37 (1) (b)
of the Law as amended, and
(b) That the Body Corporate will at any time repurchase any of its
shares from the holder at a price based on the net asset value of its
assets at the time of repurchase without any deduction except for a
reasonable service charge.
WHAT THEN IS THE DIFFERENCE
BETWEEN A UNIT TRUST AND A
A Unit Trust is a FUND. It is not a body corporate
It has a Manager, which may be a company as is the case for
HFC Unit Trust, HFC Real Estates Investment Trust, and Gold
It has a trustee. Its assets are vested in the trustee.
Its operations are guided by the terms of a Trust Deed.
Contributors to the Fund are unit holders.
DIFFERENCE BETWEEN A UNIT TRUST
AND A MUTUAL FUND – CONT’D
A Mutual Fund is a BODY CORPORATE (a company) authorized
to invite the public to subscribe for its shares.
It has a Board of Directors
It has a custodian. Its assets are held in trust for the
shareholders by the custodian.
Its operations are governed by the company regulations
The subscribers are shareholders
Examples are the E-pack Investment Fund Limited and the
Databank Money Market Fund Limited.
DIFFERENCE BETWEEN A UNIT TRUST
AND A MUTUAL FUND – CONT’D
Essentially the activities of a unit trust and a mutual fund are
similar in that they hold and manage portfolio of securities.
It is safe to say that mutual funds are American version of
units trusts (British)
The salient difference lies in the fact that the unit trust
operates under a Trust Deed whereas the mutual fund, being a
corporate body, is governed by the Company’s regulations.
For winding-up purposes the unit trust will follow the
guidelines in its Trust Deed, whereas a mutual fund will wind
up subject to the terms of the Companies Code 1963 Act 179.
TYPES OF INVESTMENT
Closed–end: Shares or units are held by specified number of
investors at time of creation; no issue of new shares or units.
Open-end: Fund stands ready to create new units and to
redeem existing units, i.e. investors can buy or sell units as
Load Fund: Sales charge required to invest in the fund and/or
to redeem units.
No-Load Fund: places no sales charge on the investor.
TYPES OF INVESTMENT
COMPANIES / FUNDS – CONT’D
A charge may be a fixed amount or a percentage of the price. L.I
1695 allows maximum sales charge of 7% or an exit (redemption)
charge not exceeding 5%. The charge must be authorized by the
constitution of the scheme.
Where a charge is imposed, there is a spread between the offer and
the bid price.
Offer price: is the price the investor pays for a unit.
Bid price: is the price the Manager buys back a unit from an investor.
Other fees charged to the Fund include Management Fee, Trustee’s
Fee , Custodian’s Fee and Auditor’s Fee.
BUYING AND REDEEMING UNITS
Purchase (Sale): Investors can buy units as often as they wish. The value of
additional units purchased are added to existing units in same account the
investor has with the Fund. For example the price of a unit is ¢100, investor has
¢200,000 to invest; ¢200,000/¢100 = 2,000 units
Sell(Redemption): Similarly the investor can sell some or all of the units held in
his account; the value of units sold are paid to the investor in return for units
surrendered at the prevailing bid price. For example, three months later the
value of the unit is ¢110, the investor needs ¢110,000 to pay school fees,
¢110,000/¢110 = 1,000 units; therefore 1,000 units will be deducted from
2,000 units held. Investors surrenders 1,000 units to the Fund Manager and in
return takes cash of ¢110,000 needed.
Accumulation unit holder: is that investor who requires reinvestment of
proceeds from dividend income.
Income unit holder: is that investor who opts to receive dividend income in the
form of cash.
WHAT IS THE COST OF
INVESTING IN CIS?
Initial Fee: Load funds impose sales charge when units are
Exit Fee: Imposed when redemptions are made
No-load funds do not impose these charges
NOTE: Load charges are used to pay commissions, etc. for
sales force. Load charges are directly borne by the investor.
Other costs, charged to the Fund (not directly to the investor)
include Trustee’s, Custodian’s, Auditor’s,Management fees and
other administrative expenses.
WHY INVEST IN CIS?
Investment in diversified portfolio (risk is spread)
Tax-free income (Internal Revenue Act, 2000 Act
592 section 10)
Safety of Investments
Professional management (skilled analysts,
knowledge of the market, economies of scale by
reason of size of funds, etc.)
WHY INVEST IN CIS – CONT’D
Capital gains distribution/dividend
Liquidity (conversion of units to immediate cash)
Flexibility (funds can be moved easily)
Records management (Book Keeping function)
Transparency (supervision by SEC, Audited Accounts, Annual
General Meetings, Statement of Accounts)
Investment plans and objectives clearly stated in prospectus or
particulars of the scheme.
Valuation:Net Asset/Outstanding units = Unit Price
Closing Price – Beginning Price + Dividends = Returns
Compare Earnings against Inflation
Risk versus Returns (returns commensurate with risk)
Benchmark against Treasury bills/notes (risk-free), GSE all
CONTRIBUTION TO ECONOMY
CIS have large pools of funds, hence play intermediary role by
providing funds to business ventures;
Invest on the capital market through purchase of “new” (IPOs)
and existing shares;
Provide funds to government through investments on the
money market i.e.Treasury bills, notes, and bonds);
Assist individuals to build up capital to establish enterprises;
CONTRIBUTION TO ECONOMY –
Provide avenues for individuals and institutions to
build capital for homeownership as sponsored, for
example, by HFC Bank. This in turn create jobs for
artisans, builders, electricians, plumbers,
manufacturers, vendors of home appliances, home
furnishings, and so on and so forth;
Savings drive economic activities and development
and that is what CIS encourage.