Understanding Special Funds
24 February, 2024 / Articles
A Special Fund is a type of a Collective Investment Scheme that invests based on the Fund Managers Investment Strategy. A Collective Investment Scheme is a pool of funds from various investors who have a common goal, and in most cases, it is promoted by a fund manager. Special Funds differ from other Collective Investment Schemes given that they are established by a fund manager for the purpose of facilitating investment by a special group of individuals with a common interest in non-traditional, high-yield investment securities. Special Funds seek to maximize current income by investing into high-yield investment options while protecting and growing investors’ capital. These funds target investors seeking to diversify their portfolio and have a moderate risk/return profile, that is, they are willing to take up risk with expectation of higher return.
In Kenya, Special Funds are monitored and governed by the Capital Markets Authority and regulated under the Capital Markets Collective Investments Schemes Regulations, 2001. According to these Regulations, a Special Fund should have a Fund Manager who administers, manages and ensures that the funds from their investors are invested in accordance with the fund’s investment objective. The fund should also have a Trustee who ensures that the fund operates in accordance with regulations and that investors’ interests are protected at all times. In addition, the fund should have a Custodian, usually a bank, approved by the regulator to hold in safe custody the funds, securities or the assets of the fund.
As an investor, some of the advantages of investing in Special Funds include;
- Regulatory and Trustee Oversight - Special Funds operations are monitored by the Capital Market Authority (CMA). Fund Managers are obligated to file monthly reports with the CMA to ensure that investors’ funds are invested according to the investment guidelines set by the Authority. Additionally, the fund also has an independent trustee who ensures that the fund is managed in accordance with the applicable laws and regulations and in general with the requisite due diligence and care which is done through exercising oversight on the Fund Manager. This ensures that Investors' funds are protected,
- Professional Fund Management - Special Funds are managed by professional fund managers with significant expertise and experience accrued over a period of time. This means that an investor does not need to have market or financial knowledge in regard to their investment because the fund manager ensures that investments are made based on comprehensive research and analysis coupled with sound risk management strategies,
- Higher Returns - A Special Fund has the ability to take concentrated positions in sectors or securities that represent the most attractive opportunities in terms of; higher rates of return compared to Traditional Investment Options, an inflation hedge, and, capital appreciation. This is achieved through intensive market and financial research that seeks to identify the investments options with the highest returns at a certain level of risk. Despite the high returns, investment in special fund tend to come with high risk, and,
- Diversification – Special Funds give investors the opportunity to diversify their portfolio, as a result of access to a wide range of securities such as Commodities and Derivatives, which would have otherwise been inaccessible if they invested on their own. The diversification of investments by Special Funds enable capital growth and provide exposure and ultimate high returns from sectors or securities with higher yields.
Similar to all investments, Special Funds involve some level of risk. The risks involved include; liquidity risk, credit risk, foreign exchange risk and interest rate risk. Some of the high yield funds investment options such as Real Estate, are illiquid meaning that they cannot be converted to cash easily and hence pose liquidity risk. Credit risk on the other hand arises when defaults occur. All these risks can however be mitigated through proper planning by fund managers so as to ensure investors’ funds are protected and objectives of the fund are met.
In conclusion, Special Funds concentrate their investments into high yield investment options such as Real Estate, Commodities, Derivatives, etc. which unlike the Traditional Investment Options, offer relatively higher returns. However, the high returns come in with risks. An investor is therefore obligated to do their due diligence before investing and understand the objective of the fund to ensure that their financial goals align with the fund’s investment objective. Investing in Special Funds is a viable investment decision for investors seeking higher returns, portfolio diversification and capital growth.