What Are Collective Investment Institutions?

Collective investment institutions (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, real estate and money market instruments.

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. Therefore, Ukrainian investors have obtained a new opportunity to invest and increase their savings. The total CII AuM amounted to about UAH 132 bln as of Oct 31, 2011.

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

Unit (or share) investment funds (UIF or SIF) are the assets belonging to investors by the right of collective partial ownership, and are managed by an asset management company (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 (up to UAH 1.255 mln starting from 01.01.2012).

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, 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-ended – 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 terminated and non-terminated.

Terminated 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.

Non-terminated CII is created for an indefinite period of time.

A close-end CII shall only be terminated.

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-ended and interval CII shall only be diversified.

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

Non-diversified, closed-end, corporate or unit fund, which carries exclusively private placement of its securities among legal entities and individuals is reffered to as venture fund. A venture fund shall have the label “venture” in its full name. 

Such funds perform more risky investment strategies, in particular, invest into innovations-related projects.

Natural persons are allowed to invest in any type of publicly offered CII but only may participate in a venture CII if their total investments thereinto (total value of the fund's stocks or investment certificates acquired) are not less than 1,500 minimum salaries (UAH 1.641 mln as from 1st Apr 2012 with gradual rising to UAH 1.701 mln effective as from 1st Dec 2012).