Fund Units

Investment Fund Units

Hungaria Equities Inc reacting to the increasing market demand wants to make investment fund units not registered on the Hungarian market available for clients. Investment funds have undergone a huge transformation across the globe in the last few decades, basically they have become a widespread and popular financial product in all developed countries.

The advantages of investment fund units

The success of investment fund units can be attributed to the following:

• Cost effectiveness:  It is clear that under a certain size it is not worth directly implementing a securities investment as the cost of a single purchase will be relatively higher.
• Risk distribution: By splitting the invesmested sum among different instruments, the risk can be efficiently reduced, that is e.g. the risk of a portfolio consisting of two equally risky asset is less volatile than the individual risks of its components. Thus the more instruments we have in a portfolio, the higher the proceeding risk reduction. Such risk distribution is not possible to individual investors, it is only accessible for them via an investment fund
• Liquidity: One indisputable advantage of open-ended investment funds over all other forms of saving is its unequalled liquidity, that is investors can flexibly change the size of their investment at little cost.
• Expertise: it is obvious that due to the current, developed nature of the equity market a certain level of professional knowledge is required when investing, which can only be supplied by experts. It is typical that under a general fund manager there are portfolio managers handling specialized market tradings.
• Publicity, information: the provision of reports and other information about investment funds is much wider than in the case of any other forms of savings. Hence, these funds can be considered the most transparent forms of collective investments.
• Security, institutional guarantees: there are strict legal regulations in place regarding investment funds and fund managers, also these regulations are much more transparent and controllable than those for banks and other financial institutions. The safety of investments is guaranteed by the strictly supervised institutional controlling system. The essence of this – as it was intruduced previously –is that the main tasks are divided between the different institutions which are continuously supervising each other, providing the highest level of security.

Business philosophy

Hungaria Equities Inc’s basic business principle is to maintain its independence by keeping up complete objectivity. The market of Investment Funds is a highly sensitive one, due to the large number of domestic investment service providers who offer their own or distribution-contracted Investment Fund Units for their clients. Unfortunately, these offers do not mirror in all cases the optimum solution for investors. We often experience, that despite the best intent, some customers purchase Investment Funds Units, the performance of which is much worse than that of other funds operating on the same market. This arises from the distribution restrictions  of certain investment providers. Hungaria Equities Inc. is trying to cover this market gap with its activity and providing the most prudent information to its customers. Our internaional connections give us the opportunity to be competitive and fully market-conscious in the field of trading Investment Funds Units when offering this service to our customers.

Investment Funds

Investment Funds are a kind of construction which are strictly regulated by law, and where the money of investors is accumulated into Investments Funds Units, then invested with the guidance of highly educated portfolio-handling experts.
The Fund is an aggregation of assets  that is jointly possessed by investors and it is established and handled by Fund Manager Companies. Investment Fund Units embody the investors’ share of the aggregate assets. The current value derived from the aggregation of assets for an Investment fund unit is derived from and indicated by the net per unit asset value (the market rate of the unit). In order to calculate this rate – based on the actual market value of particular instruments –valuations should be continuously determined thus there is always a current rate. It is important for the net asset value to contain the charges, so practically it embodies the sheer asset value; theoretically this is the value of the assets of the Fund which they could be sold at. So a change in the value of the investment fund units directly depend on variation in the valuations of the Funds’ investments.  It is also important to know the basic law of investment: the yields come together with risks which can be captured by the volatility of investment values. Higher yields are typically coupled with higher levels of risks, so investors ought to take both factors into account when making a decision.
For Investment Funds there is no interest payment, instead they produce a yield. The yield of Investment Funds is never predetermined. Using the aggregate assets the Fund Manager (with considerations to applicable regulations) buys different securities or property. These different types of investments are referred to as the portfolio of Investment Funds. The Fund Manager cannot tell in advance what size of yield will be obtained after at the end of each period. The rate of Investment Funds Unit can increase or decrease from one day to another, and there is no guarantee for steady growth. The reason for this is precisely that the money is invested into not only one, but several different instruments of varying riskiness and expected yield, the market rates of which can vary independently of one another. In case of bank deposits it is easy to determine the interest that the bank will pay on our deposits. This rate of interest will always be positive. The yield of Investment Funds, in a particular period can be negative. It is also possible that we can only sell our Investment Funds Unit for less money than what  we bought it for. But contiunous yield diminishing is a very rare occurrence in a well functioning market, and in case of period of negative yield it is suggested to wait and sell these Investment Funds Units after a rise.

The most important parties in an Investment Funds handling institution:

• Fund Manager: There are several tasks a Fund Manager needs to attend to. Like establishing the Fund, making investment decisions, executing and administrating these decisions, furthermore, counselling the investors. The safety increasing convention is important, namely that the Fund Manager cannot govern accounts personally, so he cannot dispose over the assets of Fund directly, this role is incumbent on the depositary bank.
• Depository : The most important task of the depositary bank is safekeeping the assets of  the Fund, technically executing the securities transactions, determining and publishing the net asset value of Fund. At the same time, the Depositary is supervising Fund Manager activities.
• Distributors: their task is the distribution of Investment Funds Units, supplying investors with information.
• Auditors: their task is auditing the Disclosure Statement of the Fund and controlling the bookkeeping.
• Supervisory: Permits the establishment of Funds, continuously controls the activities of Fund Managers and Depositories.
• Real estate valuators: their task is to determine the value of the properties which are owned by the Real Estate Funds.
• Advisors: the Fund Manager might recline upon advisors in order to form the portfolio of his Fund. Advisors need to be presented in the prospectus of Fund.

Investment Strategies

If we can only spare our money for a short while (even if as for little as a few days), the best solution is Money Market Funds. In Money Market Fund portfolios usually there are Government Bonds with expiry within 1 year.  Their risk is relatively low, but on the long-run they can provide lower interest rates than the other type of Government Bonds. Their yield is a little bit higher than the rate of inflation and they work as a bank current account.
If we would like to invest our savings for the medium term (from 6 months to 2-3 years),  the longer expiry Govermnent Bonds and Corporation Bonds contained by Bonds and Equity Funds offer a much better solution, than Money Market Funds. These Funds hold only Bonds and Equities in their portfolio. The expected yield of Bonds and Equites Funds is higher on the long-run, than the yield of the low-risk Money Market Funds or bank deposits. In the portfolios of Bond Funds there are Government Bonds, Corporate Bonds and a maximum of 10 percent shares. It might happen that these Funds produce a loss on the short run (their rates might drop from one day to another), but after a longer period, the patient investor may realise higher yield than with Money Market Funds. The risk of Equity Funds is higher than average. The  suggested investment duration of Bonds Funds is minimum 1-3 years, the Equity Funds have even longer duration. What does this really mean? By no means does it mean that it is unadviseable to invest into these Funds for a shorter period, but if we want to play safe, it is reasonable to allow a certain length of time for our investments to mature. Evidently, the proposed term is also in accordance with the risk of the given Funds. The least risky are the Money Market Funds, their rates increase day to day, but only by small margins. The Bonds Funds are riskier than the previously mentioned Money Market Funds, but less risky than Equity Funds. The risks of Real Estate Funds are placed somewhere between the riskiness of Money Market and Bonds Funds.
Mixed Investment Funds could be a good choice in the medium term. Shares and bonds both appear in Mixed Investment Funds portfolios. The proportion of shares is musually between 30 and 40 percent within the portfolio. When is it sensible to choose this type? When we cannot decide whether to choose Equity or Bonds Funds. The Mixed Investment Funds contain both of them, so opposite price change impact can reconcile eachother. This form of invesment is moderately risky. Characteristically, the yields fluctuate in a shorter space of time, but their performance projected for the long-run is better than that of the previously demonstrated opportunities.
If we intend to invest our savings for several years, the best solution could be Real Estate Investment Funds. The Fund Manager purchases or rents property using the aggregate assets of the Fund. Buying or renting property is an investment much more costly than the purchase of securities. For this reason Real Estate Funds can only be profitable to investors for the longer term. In relation with Real Estate Funds we can separate the Real Estate Distribution and the Real Estate Development Funds. In the portfolio of Real Estate Distribution Funds none of the individual properties can exceed 20 percent of the capital of the Fund, and the proportion of properties which are under construction cannot be higher than 15 percent. In Real Estate Development Funds these two rates are 30 and 60%.

Investment Funds in the EU

The market of the Investment Funds in Europe is highly concentrated, based on place of registration. Jointly France, Luxembourg and Germany own 57,8 percent of the market. The United Kingdom, Ireland and Italy follows. The total assets of the UCITS Funds is the greatest (4.085 billion EUR), currently covering 78.7 percent in the Investment Funds market.

The UCITS Funds:
The UCITS (Undertakings For The Collective Investment Of Transferable Securities) are a kind of specially formed collective investment portfolios, which exclusively invest the assets from investors. The meaning of the UCITS principle is that UCITS investment policy and the operating permissions for adequate Investment Handling companies is set to determined requirements. The UCITS law aims to ensure a high level of protection for investors. It is based on strict investment limits, equity and publishing demands, furthermore the safe-keeping of assets, which is fulfilled through the surveillance of an independent depositary. The UCITS are enjoying the advantages of the„European Passport” , which makes it possible to offer UCITS to private investors in any European countries (with a notice obligation), once they get permision in a member country. 28 830 UCITS Funds handle 4 trillion EUR today.

Non-UCITS Funds:
The market of Non-UCITS Funds is dominated by four basic types: the German ’Spezialfond’ which handles the assets of institutional investors, the British Closed-end Funds, the Asset Funds and the French Open-End Employee Savings Funds.

Grouping of Investment Funds

Grouped by legal forms of Funds:

• Investment Funds (mutual fund, Fonds Commun de Placement – FCP)
• Open-end investment companies, OEIC, Societe d’Investissement á Capital Variable SICAV)
  In case of Open-end Investment Funds, after the closing of subscription it is possible to purchase Investment Funds Units always at their actual values, that is at the price derived from the net asset value. Naturally, at this price these Units can also be sold, creating a high level of mobility. Minimal charges are debited after purchase or sale. In case of Equity Funds there is usually a minimum determined time period, for which the money should be kept in the account (for example, two weeks).
• Closed-end investment company, CEIC, Société d’Investissement á Capital Fixe SICAF)
  In case of Closed-end Investment Funds we can calculete on determined duration (which can be prolonged by the decision of Funds Manager). The Investment Funds Units can be purchased only in the subscription period from the issuer, later it is only possible to buy in the stock-exchanges or in case it is not introduced to any market, they can be traded in the over the counter market. Naturally it is also true for selling. If we would like to convert our investments into money it is a slower procedure and more costly to get rid of a Closed-end Fund Unit than of an Open-end Fund or of shares.

Grouped by the structure of Funds:

• conventional simple portfolio funds
• umbrella funds (aggregate of specific funds)

Grouped by investment policy:

• equity funds
• bond funds
• mixed funds

this kind of funds contain both equities and bonds.

• money market funds

in the case of  money market funds it is important to mention, that this kind of funds constitute the investments considered the most secure, because they invest their money only in short-maturity government bonds and repos, producing low but precalculable yield.

• sectoral funds

We can discern amongst them according to business sector, geographical region, type of company

• derivative funds
• fund of funds
• alternative investment funds
• asset funds
• venture capital funds -- hedge funds

Hedge Funds were for a long time such legally defined investment funds, that could only be afforded by millionaires, and  were in fact only available for high earning people. A lot of these set USD 250000-1000000 as minimum investment amount still today. However, by now the situation has changed significantly, with smaller investors also beeing able to gain yields of Hedge Funds. The biggest difference between the ’traditional’ investment funds and hedge funds is, that the the prior ones are trying to beat the performance of any kind of index (for example, BUX, RAX, Nasdaq Composite, FTSE 100)and the latter ones aim for positive yield for every year. In addition they try to achieve a lower level of setbacks and volatilities. They attempt to succeed at this by shorting, with futures and options, currency trading and often by using high leverage ratios.

• others.

Grouped by denomination:
Euro, US Dollar, British Pound, Swiss Franc, South-African Rand etc.

Grouped by guarantees for customers:

• there is no guarantee, but the size of the carefully chosen Fund and the expreince of the Fund Manager needs to be provide enough safety to reach the desired yield.
• guarantee for a part of the equity
• full capital quarantee
• yield guarantee

Grouped by fund managing techniques:

• fund handled by a Fund Manager
• fund handled by more Fund Managers
• pooling of funds
• others

Basic definitions:

Fund manager
A kind of financial company, that works out the portfolio, construction and operational frame of Investment Funds. It is also the Fund Manager’s task to provide a continuous flow of information.

Portfolio of an Investment Fund
the composition of different types of investment, for example securities or property.

Investment Funds
A financail tool, which makes the investment of different investors’ savings possible as a ’ common asset mass ’ by buying Investment Funds Units.

Investment Funds Units
Collective Investment Securities -in other words - the Investment Funds Unit is a security which has a market rate every day, the value of which is determined by the rates of different securities in the Fund.

Diversification
Please see at risk-sharings

Securities Investment Fund
An Investment Fund, which invests the collected assets into different kinds of securities.

Duration
Given the Investment Fund and the period of validity of the appertaining Investment Fund Units, it is the period between the starting and closing date.

Yield
The yearly payback of any kind of security (also the Investment Fund Unit, which is a collective investment security) - calculated as the percentage of the current market rate.

Real Estate Investment Funds
A kind of Investment Fund, where the collected asset is invested into property

Risk-sharings
In Investment Funds the size of the aggregate assets in itself allows for the possibility to diversify which significantly lessens risks.

Bond-type Investment Funds
They are a kind of Securities Investment Funds, the portfolio of which contains mainly short and long term bonds.

Liquidity
The advantage of Open-end Funds is that investors can withdraw their money with small costs any time without loss of interest.

Size thrift
In the case of Investment Funds, small investors are able to place their savings into constructions they could not afford by themselves. As thousands of investors place their savings into Investment Funds, the risk and transaction costs are split among the total number of investors.

Open-end Investment Funds
These are Investment Funds, for which there is no time minimum for withdrawal, so investors can place their savings any day, or if they wish to pull out the invested amount or a part of it, (with the yield reached)  it is possible any time.

Money Market Investment Funds
The portofolio of this kind of Securities Investment Funds contains mainly bank deposits, and short-period Government Bonds.

Equity type Investment Funds
The portfolio of this kind of Securities Investment Funds consists of different  stocks.

Special Investment Funds
This kind of Securities Investment Funds is created in a very special construction, e.g. the Fund Manager guarantees the protection of the invested equities

Asset-apportioning
Investment Funds keep a number of different assets in their portfolio, because they intend to reach the highest yield with respect to a limited risk level. If one of the funds does not perform well the loss can be compensated by the profit of other investments.

Close-end Investment Funds Unit
A type of definite-term Investment Funds. Close-end Investment Units cannot be re-exchanged until maturtiy and after the closing of the subscription period new Investment Funds Units will not be distributed. Usually Close-end Investment Funds are established for a definite period of time

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