Collective Investment Organizations (CIOs)

Zǎoshang hǎo (早上好) wisdom! Joeun achim (좋은 아침) wonder! May GOD guide your steps. May every snake and scorpion sent into your home be struck, driven away, and crushed. Do not be distracted by disbelief, criticism, and complaints. Accomplish your mission.

"Cut the grass in the fields, and while the new grass is growing, gather hay on the mountains. Have sheep to make clothes for yourself, and goats to buy a field. Use the milk your goats give in abundance to feed yourself, your family, and your servants." (Proverbs 27:25-27, French courant)

"He who walks with wise men will be wise, but a companion of fools will suffer harm." (Proverbs 13:20, French KJV)

Mutual funds are companies that collect, invest, and/or manage the savings of various investors. Mutual funds are made up of different types of securities. Securities are financial instruments that can be traded on the stock market. UCIs may specialize in one or more sectors of activity, geographical areas, types of securities, company sizes, innovative companies, etc. Each UCI has its own characteristics.

These organizations allow investors to reduce their exposure to risk (diversification), spread their investments more widely,  gain easier access to new opportunities, achieve economies of scale, and benefit from the skills of professionals or experts.  Exposure to risk is reduced because the wide range of investments reduces the effect that a specific investment can have on the overall performance of the portfolio. Economies of scale refer to the decrease in average costs due to increased quantities. The product or service is cheaper to produce in large quantities due to the broad distribution of fixed costs and the optimization of variable costs (reduction of waste, new tools, favorable supplier rates).

By purchasing shares, investors gain access to the investment organization's portfolio. Before investing, purchasers of these shares must be informed in advance of the management terms and conditions: type of financial assets, management method, objectives, fees, share price, frequency of value calculation, etc. This is so that they can choose the fund(s) best suited to their situation, objectives, and constraints. The information must be available and public. Unfortunately, this is not the case in all countries, but it should be.

There are two ways of managing a mutual fund: passive management and active management. Passive management consists of replicating a stock market index. The expected performance is therefore close to that of the replicated index. Active management is based on the manager's analysis and convictions. The manager selects securities (purchases and sales) to match or exceed the performance of an index, or to achieve a specific medium- or long-term objective. The manager may purchase units of other UCIs. This is known as multi-management. Management fees for active management are generally higher than for passive management.

In France, there are two types of collective investment undertakings (CIUs): UCITS (Undertakings for Collective Investment in Transferable Securities) and AIFs (Alternative Investment Funds). UCITS exist in all countries. They are the most common category. AIFs have specific names and characteristics in each country. They are often intended for institutional clients. Institutional clients include financial institutions, companies, government organizations, pension funds, investment funds, retirement funds, foundations, etc.

The main types of UCITS (Undertakings for Collective Investment in Transferable Securities) are FCPs and SICAVs.

SICAV (open-ended investment company):  It issues shares as and when subscription requests are made. The capital is variable and increases through the issuance of new shares (when investors buy shares). Investors who buy shares become shareholders. They can express their views on the management of the company at general meetings (if the shares are registered) and/or stand for election to the board of directors. This is, of course, provided that they hold a certain number of shares. Some SICAVs are owned by thousands or even millions of shareholders. Priority is given to majority shareholders. SICAVs are public limited companies. Investors pay entry fees (when they buy), exit fees (when they sell) and management fees.

Shareholders are free to sell their shares. The SICAV buys back the shares and pays the investor. The capital decreases but will increase again when other investors buy shares. There are two types of shares: 

• Accumulating or capitalization shares: the SICAV automatically reinvests dividends (profits).

• Distributing shares: shareholders receive dividends each year. The dividend varies from year to year.

An FCP (mutual fund) is a joint ownership of securities that issues shares. An FCP is not a legal entity. The shares are either accumulating, distributing, or a combination of the two. Investors, known as holders, are not consulted. The fund is managed either by a management company (banks, insurance companies, others), which may or may not belong to the natural or legal person who created it.

The FCPE (Fonds Commun de Placement d'Entreprise) is an alternative investment fund derived from the FCP (mutual fund). The saver holds units in a portfolio of financial instruments, shared with other people. This type of fund is exclusively open to employees and former employees of the same company or companies belonging to the same group. Employees' savings are paid into a PER retirement savings plan (PER) or a company savings plan (PEE). The person (legal or natural) who created the fund holds shares in the FCP.

A mutual fund (FCP) should not be confused with an investment company, also known as an investment fund. An investment company is a private or public financial company whose main purpose is to invest capital in companies and business projects. It brings together several investors who pool their funds so that they can be invested in listed and/or unlisted companies. Subject to certain criteria, investment companies can be created by governments, individuals, or financing organizations.

An investment company may hold and/or manage several funds, known as mutual funds (FCP). By "hold," I mean that it controls the largest number of shares. This company may or may not be a SICAV. Banks, for example, have several mutual funds but are not SICAVs. Banks may be commercial and/or investment banks. If the bank belongs to a banking group, it is highly likely that the management of the FCP will be entrusted to a company belonging to the group. Confusion arises from the similarity of the names.

The trap is to believe that because the person (legal or natural) who created the fund is successful and well-known, all of their mutual funds (FCP) are performing well. This is not necessarily the case. There are three main reasons for this:

• The person (legal or natural) who created the mutual fund may have several sources of income. The management, entry, and exit fees of the mutual fund may represent only a small portion of the income.

  
  

• Each mutual fund is unique, with different levels of risk exposure. Suppose that the headquarters of the company that created the mutual fund is located in a prosperous country and that the mutual fund's assets have been invested in companies based in countries at war. Or suppose that the company that created the fund is located in a country at war and that the funds have been invested in high-potential companies in fast-growing countries. In both cases, the fund's performance alone cannot explain the results of the company that created it.

• The time factor. What is effective or profitable today may not be so tomorrow, and vice versa.

🙂 Example

• Let's imagine the Prospère banking group (fictitious name), 55% owned by the Gloire company.

• Let's assume that the group owns several institutions, including two commercial banks, a private bank, an investment bank, an insurance company, and a fund management company.

• With the exception of one commercial bank and the fund management company, all institutions are named after the group, which is also the trade name.

• Thus, commercial bank 1 is Prosperous Bank. Commercial bank 2 is Heritage. The private bank is Prosperous Private Bank. The investment bank is Prosperous Investments. The insurance company is Prosperous Insurance. The management company is Prudent Management.

• Prudence Gestion manages the mutual funds (FCP) of all the institutions in the group. Each mutual fund has different characteristics and objectives.

• Let's assume that the investment bank has 10 mutual funds and that the other institutions in the group each have two mutual funds listed on the stock exchange and one unlisted mutual fund.

• Each of the mutual funds is known by a name beginning with Prospère. Example: Prospère FCP 1A, etc.

• Let's assume that we can buy shares in the Prosperous group, buy units in the mutual funds, or buy shares and units in one or more mutual funds. The Prosperous group may or may not be listed on the stock exchange.

• Let's assume that we have purchased shares and units of two mutual funds. If the Prosperous group makes a profit, we will receive dividends. The mutual fund units will be remunerated according to the fund's performance, regardless of whether the group incurs losses or not. The group will only receive the amount of the entry, exit, and management fees from the mutual funds.

• Gloire is not listed on the stock exchange. Whether or not the Prosperous Group is listed on the stock exchange does not change the previous point.

• The trap is to believe that because the Prosperous group is prosperous and the mutual funds were created by the Prosperous group's institutions, they are all performing well. This is not necessarily the case. Why?

** Zǎoshang hǎo (早上好) = Good morning in simplified Chinese

** Joeun achim (좋은 아침) = Good morning in Korean