Mutual funds are run by professional fund managers, who may choose to appoint other professional bodies to undertake, under contract, one or more aspects of running their funds, such as:

  1. investment managers – to manage the portfolio of investments;
  2. marketing companies – to advertise and promote the funds;
  3. selling agents – to actively sell the funds‘ shares or units;
  4. administrators – to perform accounting and servicing functions;
  5. registrars or transfer agents – to maintain the registers of share- or unit holders.

FundsSometimes, it is the trusteematual funds invest financial advice of a trust who not only has responsibility for the safe custody of fund assets but also has responsibility for maintenance of the register of holders. More typically it is the manager who fulfils that duty, if necessary by delegated appointment by the trustee. Regulations typically require that the manager does not perform the function of custodian of fund assets, and that this is the responsibility of an independent custodian, depositnry or trustee, in whose name the fund’s assets are to be held or registered.

Though these third parties are usually regulated firms themselves and appointed by the manager, they are accountable to the shareholders and the regulators for the safe-keeping of the fund’s assets, whether under their control directly or via the services of a sub-custodian. This is one function that may not normally be delegated to the manager, any more than the manager may delegate the function of investment management to the custodian, depository or trustee. This separation of responsibility is at the heart of investor protection, although, of course, protection is limited to safe-keeping and does nothing to protect against falling markets or incompetent portfolio management.

Another usual regulatory requirement is for the manager’s obligations to maintain records and to prepare accounts to be subject to audit by a qualified person or firm, typically a’registered auditor’. The frequency of an audit may vary but auditors are usually required to examine the books and records at least once a year and to report to the fund’s shareholders annually.

Compliance with detailed regulations governing the operation and marketing of a fund is the direct responsibility of the manager but the auditor and, in certain key respects, such as valuation, pricing and investment constraints or limits, the custodianmatual funds invest financial advice/ depositary/trustee will have duties of oversight.

A number of factors and considerations determine the extent to which a manager will `outsource’ functions, including restrictions imposed by regulations. Much will depend upon the background of the management firm and why it has become involved with investment funds. Managing its clients’ investments, particularly its smaller clients’ portfolios, through the medium of a mutual fund, is a natural, economic and administratively convenient step for a stockbroker or asset manager to take and it is likely that it will perform all the necessary functions itself. By contrast, a firm that has established a mutual fund on the back of its reputation in a non-investment field will almost certainly rely on specialist third parties to provide it with all the necessary functionality. Examples from the UK include Marks & Spencer and Virgin, together with several of the banks and building societies that set up investment funds as a defensive measure to avoid the loss of deposit funds when investment returns are superior. As a general matter, outsourcing administrative functions, particularly registration/transfer agency and fund accounting but also dealing and investor servicing, has seen significant growth in recent years.

WHAT’S IN A NAME?

The names managers give to their mutual funds will typically convey some idea of investment objective and possibly of investment policy, but rarely indicate whether the fund is a trust or a company. Most jurisdictions have an accepted acronym or designation for companies established under their laws, such as ‘Inc.’, ‘plc’, ‘Ltd’, but these are rarely used, or required to be used, by unlisted investment funds structured as companies and there is no designation to identify that a fund is structured as a trust.

Open-ended and closed-ended fundsmatual funds invest financial advice

Whether a fund is open- or closed-ended is another feature not conveyed by the fund’s name, although the designation ‘ICVC’ is used as a suffix to the fund’s name by some UK OLEIC managers, to denote a fund that is, in regulatory language, an ‘Investment Company with Variable Capital’ but this practice is not mandatory or widespread. Open-ended funds are ones that are authorised to have a variable amount of capital in issue. Shares or units are issued to investors whenever they pay in a lump sum or make subscriptions by way of a regular savings scheme. Unless the manager has a stock of shares available from a prior creation of new shares or from departing investors, he must arrange for the fund to receive payment for a further creation of new shares. When investors want to leave the fund, they sell their shares or units back to the fund manager, who is said to redeem or repurchase such shares. The manager may cancel any shares redeemed or he may elect to reissue them to an incoming investor.

Closed-ended funds have a predetermined, finite amount of capita] in issue. New shares or units cannot be created or cancelled on a day-to-day basis. Investors wishing to buy or sell shares or units must do so by transacting with other investors, typically through a stock exchange. Regulators usually insist upon a stock exchange listing for closed-ended funds that are to be publicly marketed, such as investment trusts in the UK. Closed-ended mutual funds often have a fixed duration, typically 10 or 20 years. Most open-ended funds have no fixed end date.

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