Pooled Investment Vehicles: The Basics
Pooled investment vehicles, which are typically large investment funds built by aggregating relatively small investments from individuals, provide an opportunity for non-wealthy investors or people who want to invest only a small amount of capital to participate in investments otherwise available only to sophisticated investors or financial institutions.
This page will discuss pooled investment vehicles, their advantages, and several of the most common types of these vehicles.
As its name suggests, a pooled investment vehicle (PIV), sometimes called a pooled fund, is an investment fund raised by pooling small investments from a large number of individuals. One common type of pooled investment vehicle is a mutual fund.
The professional management team responsible for a pooled investment vehicle combines these individual investments into a single large fund that is then deployed for investment purposes. The group of individual investors is all stakeholders in every investment the fund makes, in proportion to the size of each individual’s investment in the fund.
Pooled investment vehicles are sometimes organized as standalone companies, and in other cases, they are arranged and managed as entities within a larger business, such as a brokerage house.
One way to understand the advantages of a pooled investment vehicle is to consider the healthcare industry. Often, small companies that need to purchase health coverage for their employees find that the options available to businesses of their small size are unsatisfactory. The premiums are high, the choices of plans are limited, and the administrative costs are too burdensome.
So these small companies will often band together with other small businesses — effectively pooling their employees into a single large entity for the purposes of acquiring health insurance. Typically, these companies work through a professional employer organization — a business that helps aggregate these groups of small health-insurance customers into one large buyer, helps them negotiate a better deal for coverage, and then helps to professionally administer the health plans for each company.
The key benefits for these small businesses seeking health insurance, then, are as follows:
Small companies, which alone do not have the negotiating leverage to purchase the plan they want at the price they want, now have much more negotiating power because they are part of a large group of buyers.
Even though this pool of small businesses has banded together to act as a single large healthcare customer, each individual company in the pool will have its own needs and goals. But because they are acting as one large-scale entity, this pool will still be able to negotiate better rates and terms for various types of plans for its different member companies.
Indeed, because they are part of a large group, some of these small businesses will have access to plans they wouldn’t if they approached the insurance company alone.
Because they have joined this pooled healthcare vehicle under the management of a professional employer organization, these small businesses now have access to professional management and administration of their healthcare plans, a service not part of the core competency of any one of these small businesses and which would likely not have been cost-effective for any of them to hire directly just for their own company.
Pooled investment vehicles work in a very similar way, providing similar benefits to individual investors that pooling employees do for small businesses seeking to buy health insurance. When individual investors place a relatively small amount of capital in a pooled investment vehicle, then, they can benefit from:
Because the pooled investment vehicle allows the entity to make larger-scale investments, the costs of buying and selling shares go down per dollar invested.
You can think of this as similar to the increased negotiating power of a large customer (such as in our healthcare example) over a smaller-scale buyer.
Just as in our healthcare example, where the larger combined entity enjoys access to a greater number of health plans than would any individual small business, when you participate in a pooled investment vehicle you will have access to a larger number of investment opportunities.
This is because the pooled fund is large enough that it can deploy its capital across a far broader range of investments than any of the fund’s individual investors could with the small amount of money they placed into the fund. This allows a pooled investment vehicle, if its managers so choose, to diversify the fund’s exposure to industries, businesses or asset classes. Moreover, every individual investor can participate in the potential for returns on every investment made through the fund.
When you participate in a pooled investment vehicle, your investment is managed by a team of professional fund managers. Unless you are an expert in the financial markets or are extremely confident in your own ability to devise a winning investment strategy, this professional management can be a benefit in that it allows you — with only a small outlay of your own capital — to tap into the experience and knowledge of a team of investment professionals whose fees and reputation depend in part on how well they manage your fund.
A real estate investment trust, or REIT, is one common example of a pooled investment vehicle. A REIT is a real estate company that operates by pooling money raised from investors (individuals as well as institutions) and using that capital to purchase real estate — often a large portfolio of properties.
REITs often focus on specific types of property, such as apartment complexes, retail properties or industrial buildings.
While many REITs are traded on public exchanges and anyone can purchase shares in them, certain REITs are closed or private. These REITs generally require a relatively large minimum investment — far more than a single share of a publicly traded REIT. Also, private REITs are often open only to accredited investors, which the US Securities and Exchange Commission defines as people meeting certain minimum criteria for net worth, income and investment knowledge and savvy.
One way to invest in a non-public real estate investment trust even if you do not meet the SEC’s definition of accredited investor is to invest in a REIT available through a real estate crowdfunding platform, such as RealtyMogul’s MogulREIT I.
By participating in the MogulREIT pooled investment vehicle, you can place as little as a $5,000 investment and buy into a non-public REIT that, unless you were a qualified investor with much more capital to invest, you might not otherwise be able to access at all.
But you should enter into any REIT investment understanding that these investment vehicles, like all other types of investments, carry risks. Publicly traded REITs, for example, function just like other stock issues traded on the public markets, and they can, therefore, lose value if the market or a given market sector in which the REIT has invested drops.
Moreover, because REITs are tied to real estate — an industry that can experience significant fluctuations with the growth or contraction of the economy, a change in interest rates, or other factors — the value of a given REIT can also experience strong fluctuations. For this reason, before investing you will first want to do your due diligence and learn about REITs in general, and then thoroughly vet a specific the REIT you have your eye on.
A mutual fund is another type of pooled investment vehicle, where professional fund managers raise capital from many individuals and institutions, aggregate this capital into a single large fund, and then use the fund to purchase and manage a portfolio of investments.
As a mutual fund investor, you are buying into an investment vehicle that itself is likely invested in hundreds or even thousands of stocks or other assets.
Because your investment is part of this larger pool, you may enjoy the diversification of owning a wide range of assets, along with the expertise of the team responsible for managing the fund’s portfolio.
But before placing an investment in a mutual fund, you will need to familiarize yourself with the risks associated with these investments. Some mutual funds, for example, are invested in bonds or other types of debt, which makes those investments sensitive to changes in interest rates. Mutual funds can also be vulnerable to currency risks (when a portion of the fund’s investment is tied to a foreign currency, and that currency fluctuates), liquidity risk and other types of risks. Investors should be aware of a mutual fund’s fee structure and the potential for fees to erode any returns.
You will want to research these and other mutual fund risks well before investing.
An ETF, or Exchange Traded Fund, represents another category of pooled investment vehicle. The NASDAQ defines an ETF as an investment fund (a portfolio of securities) that tries to track a specific index, like the NASDAQ itself, or the S&P 500, the Russell 2000, etc.
Just as with other pooled investment vehicles, the managers responsible for these funds raise capital from a large number of individual investors (and institutions) and then pool this capital into a large single fund for the purposes of making investments. With an ETF, however, the fund managers purchase a basket of equities on a given stock index that will replicate as closely as possible the yield and the returns of that index as a whole.
In other words, unlike with mutual funds — which can be invested across any number of stocks or other assets, and whose investment mix can change frequently because its managers are trying to outperform the market, an ETF’s portfolio will generally be fixed and not change much, because its managers are trying simply to replicate the performance of the index.
ETF fund managers, therefore, make very few adjustments to the assets in their funds’ portfolios — only when they deem it necessary to keep the fund in line with the performance of the overall index.
One of the often stated benefits of investing in an ETF is that it can reduce managerial risk — the chances that a fund manager, under pressure to increase returns when managing a mutual fund, for example, will make poor decisions that cost the fund money. With an ETF investment, by contrast, you are essentially investing in the market itself.
Keep in mind, however, that ETFs, like mutual funds and REITs, have risks of their own. For example, because an ETF in many cases tracks a given index, if that index as a whole goes down the ETF’s investors will see their investments fall with it. There are other ETF-specific risks to be aware of as well — such as exotic-exposure risk (where ETFs can open up access to unusual and high-risk investments), and certain tax-related risks.
You will need to do your due diligence before investing in an ETF.
For more information, please review the Offering Circular prior to investing.
All Investments, Including Pooled Investment Vehicles, Carry Risk. Of course, it is important to keep in mind that all pooled investment vehicles, like all other forms of investment, carry risks — including the potential for lost principal. With that in mind, even though the investment you make in a pooled vehicle will be managed by professional investors, you are still advised to conduct your own research and due diligence — including researching the track record and past performance of the fund’s management team — before placing an investment in a pooled vehicle.
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