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Imperial Asset Management column

A look at fund management

By Shadreck C Vera

IN our endeavour to inform the investor about financial market operations this week we will be taking a look at the products that are offe

red by most fund managers in Zimbabwe.

Portfolio management

Portfolio management is a pro-duct targeted at pension funds, corporate/institutional investors and high networth individuals. Under the facility an investor entrusts his funds with the fund manager so that the latter can manage and grow the funds on an agent basis. The ultimate aim will be to grow the fund for the investor’s specific purpose like providing for pension benefits.

The asset allocation of the fund will depend on the investment agreement which will be expected to cover all those issues that affect the investor like the regulatory laws of the authorities and the risk appetite of the investor. What is also important to note is that in most of the circumstances these funds will be invested over a long-term and the investor will not be expected to make regular withdrawals unless it is necessary to do so, eg when the pension fund wants to pay benefits as this will defeat the ultimate aim of setting up the fund and entrusting it to the fund manager.

Depending upon the investment agreement, the fund manager will be expected to report to the trustees of the fund who will in turn assess the performance of the fund manager. The trustees are there to stand for the interest of the fund and to see to it that the fund manager is operating within the agreed terms of the contract.

Endowment funds (treasury)

The facility is offered by most fund managers and caters for all investors – small or large, individuals or institutions. Under this investment vehicle, customers invest their funds on the money market for a fixed rate and period that is agreed between the client and the fund manager. Thus the money will be fixed for the entire investment period and the investor can only have access to the money upon maturity.

However, in the case of an early redemption, the investor will be penalised for breaching the investment contract.

The rate that will be offered to the investor will mainly depend upon the amount and tenor of investment as well as many other factors like money supply in the market. However, it is worth noting that the financial position of the financial institution and the underlying asset also affects the rate of return. A financial institution that is facing serious liquidity problems will definitely offer rates above the market average in a bid to mobilise more deposits.

Endowment funds have maturity periods that range from overnight (in case of call accounts) to periods sometimes in excess of three months. Upon maturity of the investment the investor has a choice of either rolling over the investment or withdrawing the funds. The greatest advantage of endowment funds is that they are tailor-made to suit the investor’s needs in terms of the period of investment and sometimes the rate of return being offered.

Unit trusts

A unit trust can be defined as a pooled investment vehicle formed to hold investments on behalf of the beneficiaries of the trust (usually called unit holders). Usually this is designed to cater for those investors whose resources are small and thus they will be pooled together to form a big fund that can be easily and efficiently managed. Depending on the type of the unit trust the funds will be invested in some assets depending on the risk appetite of the unit holder.

Unit trusts are designed to cater for mainly those smaller investors through the pooling together of the funds and then investing them as a single large fund. Currently the minimum amount that can be invested in a unit trust account with most fund managers is $100 000.

The assets of the trust are held by a trustee and are managed by a unit trust manager who is responsible for investment management, fund accounting, pricing, dealing and reporting. The funds can be invested in an array of assets that range from money, equities and property markets or a combination and thus the following:

Money fund – This is when the unit holders’ funds are fully invested in the money market instruments. The fund is associated with the least risk and unit holders are guaranteed of at least their capital plus interest which depends upon the market rates;

Equity fund – Investors’ funds will be fully invested in the equities market. This is designed for those investors who are willing to take a higher risk but for a better return. It is also a fund suitable for those investors who have a medium to long-term investment horizon. Generally, over the long-term this fund is expected to perform better than the money fund as well as above inflation.

Property fund – Under this arrangement funds will be fully invested in the property market. This fund, like the equities, is suitable for those investors who have a long-term investment horizon and performs exceptionally well under an inflationary environment;

Balanced/Hybrid fund – In a bid to increase return but at the same time cautious about risk exposure, some investors will prefer to invest in a combination of these three markets. Thus the fund is expected to perform better than the money fund but in the long-run outperformed by the other two.

These are some of the products that are offered by some fund managers in Zimbabwe. In the next article we will tackel options, futures and swaps.

* Shadreck C Vera is the man-aging director of Imperial Asset Management Company and can be contacted through veras@imperialasset.co.zw

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