Constitution and terminology
Collective investment vehicles may be formed under company law, by legal trust or by statute. The nature of the vehicle and its limitations are often linked to its constitutional nature and the associated tax rules for the type of structure within a given jurisdiction.
Typically there is:
- A fund manager or investment manager who manages the investment decisions.
- A fund administrator who manages the trading, reconciliations, valuation and unit pricing.
- A board of directors or trustees who safeguard the assets and ensure compliance with laws, regulations and rules.
- The shareholders or unit holders who own (or have rights to) the assets and associated income.
- A “marketing” or “distribution” company to promote and sell shares/units of the fund.
Please see below for general information on specific forms of vehicles in different jurisdictions.
Net asset value
The net asset value or NAV is the value of a vehicle’s assets minus the value of its liabilities. The method for calculating this varies between vehicle types and jurisdiction and can be subject to complex regulation.
An open-end fund is equitably divided into shares which vary in price in direct proportion to the variation in value of the fund’s net asset value. Each time money is invested, new shares or units are created to match the prevailing share price; each time shares are redeemed, the assets sold match the prevailing share price. In this way there is no supply or demand created for shares and they remain a direct reflection of the underlying assets.
A closed-end fund issues a limited number of shares (or units) in an initial public offering (or IPO) or through private placement. If shares are issued through an IPO,they are then traded on an exchange or directly through the fund manager to create a secondary market subject to market forces. If demand for the shares is high, they may trade at a premium to net asset value. If demand is low they may trade at a discount to net asset value. Further share (or unit) offerings may be made by the vehicle if demand is high although this may affect the share price.