What Are Managed Investment Schemes?
Managed investment schemes (MIS) are financial vehicles that pool money from multiple investors to be invested collectively in a range of assets. These schemes are overseen by professional fund managers who make investment decisions on behalf of the unitholders, aligning with the scheme's stated investment objectives. Managed investment schemes fall under the broader financial category of investment management. The pooling of capital allows investors to gain access to a diversified portfolio that might otherwise be unattainable for individual investors due to high costs or minimum investment requirements. A managed investment scheme can invest in various asset classes, including equities, fixed income securities, real estate, and commodities.
Managed investment schemes are typically structured as trusts, where investors hold "units" in the scheme rather than shares in a company. The value of these units fluctuates based on the performance of the underlying assets. Investors in a managed investment scheme benefit from professional management, diversification, and often, lower transaction costs due to economies of scale. These schemes are a cornerstone of modern portfolio construction, enabling individuals to participate in sophisticated investment strategies.
History and Origin
The concept of pooling investor money for collective management has roots that trace back centuries, with early examples appearing in the Netherlands in the 1700s. However, the modern managed investment scheme, particularly in the form of mutual funds, gained significant traction in the United States in the early 20th century. The growth of these schemes necessitated regulatory oversight to protect investors and ensure transparency.
A pivotal moment in the history of managed investment schemes in the U.S. was the enactment of the Investment Company Act of 1940. This landmark legislation, enforced by the Securities and Exchange Commission (SEC), defines and regulates investment companies, including mutual funds, closed-end funds, and unit investment trusts14, 15. It was passed in response to the Stock Market Crash of 1929 and the subsequent Great Depression, aiming to restore investor confidence by mitigating conflicts of interest and mandating disclosures13. The Act requires investment companies with more than 100 investors to register with the SEC and adhere to rules regarding their structure, operations, and disclosure to the public11, 12.
Key Takeaways
- Managed investment schemes (MIS) pool capital from multiple investors for collective investment.
- Professional fund managers make investment decisions for the scheme.
- MIS offer benefits such as professional management, diversification, and potentially lower costs.
- The Investment Company Act of 1940 is a key piece of legislation regulating MIS in the U.S.
- The value of units in a managed investment scheme fluctuates with the performance of its underlying assets.
Formula and Calculation
The performance of a managed investment scheme is often measured by its Net Asset Value (NAV) per unit. The NAV represents the value of all the assets in the fund, minus its liabilities, divided by the number of outstanding units.
The formula for calculating NAV per unit is:
Where:
- Total Assets represents the current market value of all investments held by the managed investment scheme, including cash and equivalents.
- Total Liabilities includes all the scheme's obligations, such as management fees, administrative expenses, and any borrowed money.
- Number of Outstanding Units is the total number of units issued to investors in the scheme.
The NAV is typically calculated at the end of each business day. It is a crucial metric for investors to understand the per-unit value of their investment and track its performance, distinct from the total return which includes income distributions. Changes in the NAV reflect fluctuations in the market value of the scheme's portfolio.
Interpreting Managed Investment Schemes
Interpreting managed investment schemes involves understanding several key aspects beyond just the NAV. Investors should consider the scheme's investment objective, which outlines what the fund aims to achieve (e.g., capital growth, income generation, or a combination). A scheme's prospectus provides detailed information on its objectives, investment strategy, risks, and fees.
The expense ratio, which represents the annual costs of operating the fund as a percentage of its assets, is another critical factor. A lower expense ratio generally means more of the investment returns go to the investor. Investors should also examine the scheme's historical performance, keeping in mind that past performance does not guarantee future results. Understanding the fund manager's investment philosophy and track record is also important. For example, some managers might employ an active management approach, while others might follow a passive investment strategy. The Morningstar Active/Passive Barometer, a semiannual report, evaluates the performance of active U.S. mutual funds against passive funds, providing insights into the success rates of different management styles8, 9, 10.
Hypothetical Example
Consider "Growth Opportunities Fund," a hypothetical managed investment scheme focused on investing in large-cap growth stocks.
Suppose on a given day:
- Growth Opportunities Fund holds a portfolio of stocks valued at $500 million.
- It has $5 million in cash.
- Its total liabilities (including accrued management fees and administrative expenses) amount to $2 million.
- There are 100 million units outstanding.
To calculate the NAV per unit:
Total Assets = $500,000,000 (Stocks) + $5,000,000 (Cash) = $505,000,000
Total Liabilities = $2,000,000
Number of Outstanding Units = 100,000,000
So, the NAV per unit for Growth Opportunities Fund on this day is $5.03. If an investor owns 1,000 units, their total investment value would be (1,000 \times $5.03 = $5,030). This calculation helps investors understand the intrinsic value of their investment units and track changes in their asset allocation over time.
Practical Applications
Managed investment schemes are widely used by individual investors and institutions alike for various financial goals, ranging from retirement planning to wealth accumulation. They are a common component of retirement accounts like 401(k)s and IRAs, offering a convenient way to invest in diverse portfolios without the need for individual security selection.
In market analysis, managed investment schemes are often categorized by their investment styles (e.g., value investing, growth investing), asset classes (e.g., equity funds, bond funds), or geographic focus. Regulators, such as the SEC, continue to oversee these schemes to ensure fair practices and investor protection. For instance, the International Monetary Fund (IMF) regularly assesses the global financial system and highlights systemic issues that could pose risks to financial stability, including those related to investment funds. The IMF's Global Financial Stability Report often includes analysis on the contributions of open-end investment funds to fragilities in asset markets, particularly those offering daily redemptions while holding illiquid assets6, 7. Such assessments are crucial for maintaining stability in global financial markets.
Limitations and Criticisms
Despite their widespread use, managed investment schemes have certain limitations and face criticisms. One common critique revolves around fees. While professional management is a benefit, the associated management fees, administrative expenses, and other costs can erode returns over time, especially in schemes with higher expense ratios. Studies, such as those conducted by Morningstar, have frequently shown that a significant percentage of actively managed funds underperform their passive counterparts, particularly after accounting for fees4, 5.
Another limitation can be a lack of control for investors. Since investment decisions are made by the fund manager, individual investors have no say in the specific securities bought or sold within the scheme. This can be a drawback for investors who prefer a more hands-on approach or have specific ethical or environmental, social, and governance (ESG) preferences not fully aligned with the fund's broad objectives. During periods of market stress, certain types of managed investment schemes, like money market funds, have experienced vulnerabilities. For example, during the 2008 financial crisis, the Reserve Primary Fund "broke the buck," meaning its net asset value fell below $1 per share due to its exposure to Lehman Brothers' commercial paper, leading to significant investor withdrawals and prompting government intervention to stabilize the money market fund industry1, 2, 3. Such events highlight the liquidity risks that can sometimes arise in these schemes.
Managed Investment Schemes vs. Exchange-Traded Funds (ETFs)
Managed investment schemes, often exemplified by mutual funds, differ from exchange-traded funds (ETFs) primarily in their trading mechanisms and pricing.
| Feature | Managed Investment Schemes (e.g., Mutual Funds) | Exchange-Traded Funds (ETFs) |
|---|---|---|
| Trading | Units are bought and sold directly from the fund company at the end of the trading day. | Shares trade on stock exchanges throughout the day, like individual stocks. |
| Pricing | Priced once daily at their Net Asset Value (NAV). | Priced continuously throughout the day based on market supply and demand, often near their NAV. |
| Liquidity | Redeemable directly with the fund, potentially subject to redemption fees. | Can be bought and sold quickly on an exchange, offering higher intraday liquidity. |
| Fees | Often have higher expense ratios, sometimes including sales loads (commissions). | Generally have lower expense ratios and no sales loads, though brokerage commissions apply for trades. |
| Transparency | Portfolio holdings are typically disclosed periodically (ee.g., quarterly or semi-annually). | Portfolio holdings are generally disclosed daily. |
The key distinction lies in how they are bought and sold. Mutual fund units are transacted directly with the fund provider at the end-of-day NAV, whereas ETF shares are traded on exchanges throughout the day at market prices, which can sometimes deviate slightly from their underlying NAV. This difference in trading mechanism impacts their liquidity and accessibility for investors.
FAQs
What is the primary purpose of a managed investment scheme?
The primary purpose of a managed investment scheme is to pool money from many investors and invest it collectively, providing access to professional management and diversified portfolios that might be challenging for individual investors to achieve on their own.
How are managed investment schemes regulated?
In the United States, managed investment schemes are primarily regulated by the Securities and Exchange Commission (SEC) under the Investment Company Act of 1940. This Act sets forth rules for their organization, operation, and disclosure requirements to protect investors.
Can I lose money in a managed investment scheme?
Yes, investing in a managed investment scheme carries investment risk, and you can lose money. The value of your investment will fluctuate based on the performance of the underlying assets held by the scheme and broader market conditions. There are no guarantees of returns, and the value of units can fall below the initial investment amount.
How do I choose the right managed investment scheme?
Choosing the right managed investment scheme involves evaluating several factors, including your investment goals, risk tolerance, the scheme's investment objective, its historical performance, expense ratio, and the fund manager's expertise. Understanding the risk-return tradeoff is crucial when making investment decisions.
What are common types of managed investment schemes?
Common types of managed investment schemes include mutual funds, which are the most prevalent, as well as unit investment trusts (UITs) and closed-end funds. These schemes differ in their structure, how their units are bought and sold, and their investment flexibility.