Do common investment funds have a future?

Newton and the Charities Aid Foundation are among those that have recently decided to close their CIFs. Edward Lander looks at the pros and cons of this special financial vehicle

Mark Morford says the tax advantages of CIFs are cancelled out by the fact that they have to pay VAT
Mark Morford says the tax advantages of CIFs are cancelled out by the fact that they have to pay VAT

Common investment funds were once favoured by medium-sized charities looking for a safe place to invest their money. These collective investment schemes are aimed at charities and have traditionally been viewed as a less risky option than setting up a standalone investment portfolio because they are established by the Charity Commission and enjoy the same tax status as charities.

But in recent times a number of investment fund managers have decided to close their CIFs. Last month, Newton confirmed that it planned to wind up its Global Growth & Income Fund for Charities on 9 May, saying that it expects CIFs to become a "relatively outdated investment structure". Similarly, the Charities Aid Foundation closed two of its three CIFs in 2011, keeping only its UK Equitrack CIF open.

Mark Morford, product manager, investments, at CAF, says that the two CIFs were changed into open-ended investment company structures, another type of fund that is set up to invest in other companies and has the ability constantly to adjust its fund size and investment criteria.

He says that the tax advantages of CIFs are cancelled out by the fact that they have to pay VAT, whereas OEICs do not. Morford says that CAF might review its remaining CIF in the light of future regulatory changes.

One of the main criticisms of CIFs is that they offer only a limited range of investment options compared with the wider investment market. CIFs tend to be limited to UK equities and UK bonds and there are very few of them that specialise in property or overseas equity. A report by the Eiris Foundation in 2013, Responsible Investment in Pooled Funds, a Guide for Charity Trustees, also found that there was a limited choice of charity pooled vehicles "with responsible investment criteria beyond tobacco screens", and that there were numerous funds on the wider investment market that could better suit a charity's needs in this area.

CIFs remain good value, with annual management charges of about 0.5 per cent compared with around 1.5 per cent for a standard unit trust or OEIC. Another advantage of CIFs is that they are exempt from income tax, capital gains tax and stamp duty on the purchase of equities, though this is partly offset by the fact that CIFs must pay VAT.

John Hildebrand (left), senior investment director at Investec, says that the tax advantages are negligible compared with non-CIFs and apply only to the purchase of property and certain equities.

He says charities should be wary of placing too much trust in the fact that CIFs are regulated by the Charity Commission. "The danger is that people are getting reassurance because of the Charity Commission, whereas the commission itself is urging investors not to see them as kite-marked products," he says.

The commission currently requires each CIF to be administered and managed by a fund manager and a trustee who are authorised by the Financial Conduct Authority and independent of one another. But it says on its website that it "does not in any way guarantee the investment performance of a CIF". It adds that it will publish new guidance on CIFs in June in preparation for the Alternative Investment Fund Managers Directive, the EU legislation that regulates alternative investment funds such as hedge funds, which will be incorporated in UK law in July.

A commission spokeswoman says: "The revised guidance will explain how the new regulatory regime created by the directive has affected our model schemes for CIFs - we've now published new models. It will also explain how existing CIF schemes can be amended to be made compliant with the new regulatory regime and in what circumstances we will register new CIFs. It will make other minor updates."

Anthony Badaloo (left), principal at the financial adviser Church Hill Finance, says that CIFs are generally limited to the UK and broadening their investment remit to include more global equities would make them more appealing.

"I think it would be helpful if they had a wider choice of investment funds, particularly with a global perspective, because we're increasingly living in a global economy," he says.

Simon Dobson, senior manager at Bond Dickinson Wealth, says one reason that fewer charities are investing through CIFs could be that they are clubbing together and finding alternative ways of investing.

"If you're commanding big bucks, you might want your own fund manager there rather than someone who manages money for a collective of other investors," he says.

But despite the drawbacks of CIFs, some charity investment managers believe they should still be considered, particularly for smaller organisations. Dobson says: "I would stress that CIFs do have a place in the market, not least to add to market choice, which is a good thing for everyone."

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