Funds – investing in funds
Investment funds are not a 20th century idea, they have been around since 1774, when the Dutch merchant Abraham van Entwich founded the first so-called community fund. “Unity makes strength” was the name he gave to his fund, which he launched after one of the first major financial crises in Europe. At that time, banks in Great Britain, the Netherlands and France went bankrupt. Many bank clients and investors lost all their assets.
Van Ketwich’s idea is as obvious as it is simple. Investors buy shares in a fund with their assets instead of, for example, individual shares in a company. The fund or the fund manager, in turn, invests in various public companies from the fund’s assets (cash holdings). Ideally, the investor in a fund regularly receives a fund return every year, which the fund as a whole in turn generates with its investments, for example in shares.
Incidentally, the oldest fund authorised in Germany is the US fund Pioneer, which investors have been able to subscribe to between Garmisch and Flensburg since 1928. According to BVI Bundesverband Investment und Asset Management e.V., there are currently around 700 fund companies active in Germany.
Funds: From equities to private equity
In addition to the classic equity funds with almost innumerable variants, there is a whole range of other types of funds in which private or institutional investors can invest. These also include private equity funds, with which investors have the opportunity to participate indirectly in start-ups or growth companies, to name just two examples. But let’s take it one step at a time:
Equity funds: active or passive
For a long time, actively managed equity funds were considered the measure of all things. An equity fund invests its investors’ money in company shares. Fund managers set up a wide variety of equity funds. Today there are equity funds of all kinds: limited to countries or continents, specialised in sectors, for certain types of companies … it is a wide field. it is a wide field. The statistics portal statista.de counted around 44,000 funds worldwide in the first quarter of 2020.
Equity funds exist on the one hand as funds actively managed by a team, and on the other – and increasingly popular – as passively managed ETF funds.
ETF stands for Exchange Traded Funds. These funds are exchange-traded index funds that exactly replicate a very specific stock index. The costs of ETF funds are significantly lower than those of an actively managed equity fund. ETF or index funds are now also available in huge numbers and varieties. Statista counts 7,607 ETFs in 2020, among them now also, and this is new, actively managed index funds.
Pension funds, that sounds like security and boredom. And there is something to that. However, bond funds have only a limited connection with pensions. Pension funds or bond funds are actively managed funds that invest in bonds: e.g. government bonds but also corporate bonds. From the investor’s perspective, bonds are statistically safer than shares, but on average they give the investor a much lower return than, for example, good equity funds.
Money market funds
Money market funds give investors the opportunity to invest in securities with very short maturities, including time deposits, promissory note loans and bonds with a maturity of less than one year. As recently as 20 years ago, money market funds were considered particularly attractive. Today, anyone who invests in a money market fund because they want to invest money in the short term can look forward to low risk and an extremely modest return.
Real estate funds
Investors in real estate funds appreciate the opportunity to invest in real estate even with smaller amounts. There are open-ended and closed-ended real estate funds. Those who invest in an open-ended real estate fund can usually sell their units on the stock market at any time. However, open-ended real estate funds tend to be the exception, as investments in real estate are often associated with long holding periods. Those who invest in a closed-end real estate fund must therefore be aware that their units may be tied up for a very long time. The fact that open-ended real estate funds have also been converted into closed-end funds in the past should be a warning.
Investors who are invested in commodity funds benefit from rising price developments on the commodity markets. For example, there are commodity funds that invest in companies that are active in the commodity sector, or there are commodity funds that bet directly on commodity changes via so-called futures. The return and risk depend heavily on the demand and availability of the commodities in which direct or indirect investments are made.
Sustainable funds, which focus on ethical, social and ecological factors, are currently very much in vogue. For example, sustainable funds invest in companies that support human rights, offer fair working conditions, are committed to climate protection and renewable energies, or strive for social impact. Developments in recent years and decades have shown that sustainable funds that invest according to ESG principles (ESG stands for Environment, Social, Governance) do not have to hide from other funds in terms of returns, on the contrary. There are two things to bear in mind: Firstly, sustainable funds can contain significantly fewer values, and secondly, one should not lose sight of the problem of “greenwashing”. Not everywhere that says sustainable on the label is sustainable on the inside.
Mixed funds invest in a combination of different asset classes, such as equities, bonds, money market securities, real estate and commodities. The aim is to minimise the risk of the portfolio through broad diversification.
Private equity fund
Anyone who wants to invest their assets broadly should also look into the topic of private equity in addition to the types of funds mentioned so far. This is especially true in times when many investors are looking for attractive investment opportunities. Private equity, i.e. investments in companies outside the stock market, is booming. Private equity firms invested 513 billion US dollars in the first half of 2021 (Euro am Sonntag, 30.7.2021).
Gone are the days when private equity investors had to struggle with the locust image. Today, private equity firms invest specifically in companies and usually develop them actively and responsibly. Private equity firms that specialise in one industry and bring their industry know-how and experience to every investment enjoy a particularly good reputation.
One example of a private equity company is the Tübingen-based SHS Gesellschaft für Beteiligungsmanagement mbH, which has been investing in the healthcare sector since 1993. SHS prefers to invest in growth and medium-sized companies from German-speaking countries, the Benelux countries and Nordic countries. Investments are made in accordance with ESG and SRI principles. SRI stands for Socially Responsible Investing.
SHS aims to actively support and develop its portfolio companies. In doing so, SHS draws on the experience and know-how of a well-coordinated team and a strong network that has grown internationally over decades.
SHS currently holds 23 investments in healthcare companies. The SHS VI fund is in the starting blocks. SHS investors include institutional investors, pension funds, family offices, banks, insurance companies, churches and corporates from industry.
If you would like to know how SHS performed as a sector investor in the Corona year 2020 and how the healthcare experts see the development in the sector, here is an interview with SHS partners Manfred Ulmer-Weber and Uwe Steinbacher that is worth reading.