What are the advantages of pooled investment vehicles relative to the direct purchase of fixed-income assets?
What will be an ideal response?
Investment vehicles that represent pooled investmentsare referred to as pooled investment vehicles or collective investment vehicles.They include investment company shares, exchange-traded fund shares, hedge funds,and real estate investment trusts. Thus, one advantageof pooled investment vehicles is the variety of vehicles that are available. As such, bond investors including retail investors and institutional investors have an opportunity to invest in a pooled investment vehicle in lieu of constructing their own portfolio to obtain exposure to the broad bond market and/or specific sectors of the bond market. For retail investors, the benefits of investing in pooled investment vehiclesrather than the direct purchase of individual bonds to create a portfolio have the advantages of better diversification in obtaining the desired exposure, superior liquidity, and professional management.
Another advantage of pooled investment vehicles can be seen from the point of view of institutional bond investors who can utilize pooled investment vehicles to obtain exposure to different bond sectors where they might not have the necessary expertise. To elaborate, a bond portfolio manager might have a benchmark that is a broad-based market index butwould not have expertise in sectors included in that index.For example, a bond portfolio manager may have expertise in corporate bonds but not mortgage-backed securities (MBS). Rather than develop a team that has expertise to invest in MBS, there are pooled investment vehicles managed by a team of MBS experts. Such vehicles can be used to obtain exposure to the MBS sector. Another reason why a pooled investment vehicle might be used by an institutional bond portfolio manager may be that the fund's size may not be large enough to obtain a sufficient number of bond issues to track the sector whose exposure is sought. Finally, certain pooled investment vehicles have the advantage of creating leverage and the shorting of the bond market.
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