What Are Collective Investment Institutions?

Collective investment institutions (hereinafter – CII) are investment funds that conduct collective investment activity, that is attracting investors’ money with the aim to generate profits from investments into other issuers’ securities, corporate rights and real estate.

The first investment fund in the world was established in August 1822 in Belgium. An active development of investment funds started only after the World War II, when they were gradually becoming competitors of banks and other financial institutions. However, most of investment funds have been established in Great Britain and the USA. Today, more that a half of US householders are investors of some investment fund.

In Ukraine, first investment funds were created relatively not long ago – in 1994 and became an important mechanism of the mass privatization process start-up in , although these funds were not ready for the classic collective investment. The classic investment funds, from the viewpoint of their nature and functions, were created in Ukraine in 2003, after the adoption of the Law “On Collective Investment Institutions” (Unit and Corporate Investment Funds)” by the Parliament of Ukraine in 2001.

National collective investment market has been demonstrating positive growth dynamics for over five recent years of its development. It has ensured a sufficiently high rate of investment return, which exceeded the rate of interest on bank deposits. Today, the total volume of CII assets are more than UAH 24 billion. Therefore, Ukrainian investors have obtained a new opportunity to invest and increase their savings.

In Ukraine, CII are represented by unit and corporate investment funds.

Unit investment funds (UIF) are the assets belonging to investors by the right of collective partial ownership, and are managed by an asset management company (hereinafter – AMC), as well are accounted for separately from the AMC’s business performance results.

The unit investment fund:

is not a legal entity, and is established by an AMC by means of placing (selling) fund’s investment certificates which are issued by the AMC among the investors;
when signing contracts on purchase or sale of the fund’s assets, the AMC acts on its own behalf;
AMC performs accounting of the fund’s operations separately from its own and and other CII’s business operations;
minimal asset volume of the UIF is 1,250 minimum wages, which is equal to UAH 440 since 01.07.2006.

Corporate investment funds (CIF) are legal entities established in the form of an open joint stock company (OJSC) and conduct collective investment activity exclusively.

The corporate investment fund:

should form its statutory capital of cash, government securities and other issuers’ securities admitted to trading in a stock exchange, or a trading and information system (TIS), as well as of real estate objects; statutory capital may be increased by monetary funds only;
at least 70% of the average annual value of its assets should be invested into securities;
management of the fund (thereafter, of its assets) is performed by the AMC on contractual basis, the fund’s management bodies are the same as of an OJSC – a General Shareholders’ Meeting and a Supervisory Board.

Depending on the procedure of carrying out their activities, CII are subdivided into three types:

Open-end – if the fund or its AMC undertakes an obligation to perform, upon an investor’s demand, a buy-back of shares issued by this CII (or its AMC) at any time.

Interval – if the fund or its AMC undertakes an obligation to perform, upon an investor’s demand, a

buy-back of securities issued by this CII (or its AMC) during the time period specified in the issue prospectus, but at least once per year.

Close-end – if the fund or its AMC does not undertake an obligation to buy back the fund’s securities until the termination of such fund.

CII may be limited in time and unlimited in time.

A limited in time CII is created for a certain period of time specified in the issue prospectus of such

CII, on the expiration of which this fund is terminated.

An unlimited in time CII is created for an indefinite period of time.

A close-end CII may only be limited in time.

Depending on the asset structure, CII are divided into two types:

Diversified CII which are investment funds meeting the requirements to its monetary resources to be invested into different capital market instruments envisaged by the Law. Monetary funds can be invested exclusively into securities, placed in bank deposit accounts, or – in the amount of not more than 5 percent of the total asset value – invested into other assets permitted by the legislation.

Non-diversified CII are investment funds which meet no strict requirements to asset diversification. They are allowed to invest into real estate objects, into LLC statutory funds etc.

Open-end and interval CII may only be diversified.

Close-end CII may be either diversified, or non-diversified.

There are also venture investment funds – corporate or unit non-diversified investment funds which should have no less than 50 percent of assets invested in corporate rights and securities, which are not listed on stock exchanges. Such funds perform only private placements of their securities, and implement a fairly risky investment strategy, in particular, invest into innovations-related projects.

Natural persons may not be participants of venture CIF or UIF, and non-diversified UIF.