What Are Pooled Funds?
Let me explain pooled funds to you directly: they're investment vehicles that gather capital from multiple individual investors to form a single portfolio. You'll find examples in mutual funds, hedge funds, exchange-traded funds, pension funds, and unit investment trusts, all typically managed by professionals. As an investor in these, you gain from economies of scale, which mean lower trading costs per dollar invested, along with diversification.
Key Takeaways
- Pooled funds aggregate capital from a number of individuals, investing as one giant portfolio.
- Many pooled funds, such as mutual funds and unit investment trusts (UITs), are professionally managed.
- Pooled funds allow an individual to access opportunities of scale available only to large institutional investors.
The Basics of Pooled Funds
Groups like investment clubs, partnerships, and trusts use pooled funds to invest in stocks, bonds, and mutual funds. This pooled account treats investors as a single holder, so you can collectively buy more shares than alone, often at discounted prices.
Mutual funds are one of the most recognized pooled funds. They're actively managed by professionals—unless they're index funds—and they spread holdings across various vehicles, minimizing the impact of any single security on the overall portfolio. With hundreds or thousands of securities, you're less affected if one underperforms.
Another type is the unit investment trust. These take money from smaller investors to invest in stocks, bonds, and other securities, but unlike mutual funds, they don't change the portfolio over time and operate for a fixed period.
Advantages and Disadvantages of Pooled Funds
With pooled funds, you and other investors can access opportunities usually reserved for large investors. You save on transaction costs and diversify your portfolios further. Since funds hold hundreds or thousands of securities, you're less impacted by one underperforming asset.
The professional management ensures you get the best risk-return tradeoff aligned with the fund's objectives. This is useful if you lack the time or knowledge to manage investments yourself.
Mutual funds offer options for aggressive, mildly aggressive, and risk-averse investors. They allow reinvestment of dividends and interest to buy more shares, saving you transaction fees while growing your portfolio.
Pros
- Diversification lowers risk.
- Economies of scale enhance buying power.
- Professional money management is available.
- Minimum investments are low.
Cons
- Commissions and annual fees are incurred.
- Fund activities may have tax consequences.
- Individual lacks control over investments.
- Diversification can limit upside.
More on Disadvantages
When you pool money into a group fund, you have less control over decisions than if investing alone. Not all group choices suit every individual, and reaching consensus can delay actions in volatile markets, missing quick profits or loss reductions.
In professionally managed funds, you surrender control to the manager and pay management fees annually as a percentage of assets under management, which reduces total returns.
Some mutual funds charge loads—front-end at purchase or back-end at sale.
You pay taxes on distributed capital gains, spread among all investors, sometimes burdening new shareholders who didn't benefit from the gains.
Frequent selling by the fund can lead to annual capital gains distributions, increasing your taxable income.
Example of a Pooled Fund
Take The Vanguard Group, Inc., one of the world's largest investment management companies offering retirement services. It provides hundreds of mutual funds, ETFs, and other pooled funds globally.
In Canada, Vanguard Investments Canada offers 39 ETFs, four mutual funds, 12 target retirement funds, and eight pooled funds—the latter two for institutional investors.
One such pooled fund is the Vanguard Global ex-Canada Fixed Income Index Pooled Fund (CAD-hedged), which invests in foreign bonds. In April 2019, it adopted the Bloomberg Global Aggregate ex-CAD Float Adjusted and Scaled Index to include Chinese government policy bank bonds in its portfolio.
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