What it means
When someone talks about pooled funds in general, they usually want to contrast shared portfolios with individually owned ones. In a pooled fund the investor owns units of a larger portfolio, not the underlying shares or bonds themselves.
The fund holds the assets, and the investor holds a claim on a proportionate share. The category is wide.
Retail investors meet pooled funds mainly as mutual funds and exchange-traded funds, while institutions use pooled vehicles built for pension schemes, endowments and insurers. Banks and trust companies also run pooled funds for their clients, often with lower fees because the investors are large and share a common mandate.
Finance teams meet pooled funds in several roles. A company treasurer may park surplus cash in a money market pooled fund, a pension manager may hold pooled equity funds as part of a long-term plan, and an accountant must value those holdings at the end of each period using the fund's reported unit prices.
The accounting treatment depends on how much control the investor has and on local standards. Two features tie the category together.
First, all investors in the same class of units receive the same return per unit, so no one gets special treatment. Second, income, gains and costs are allocated in proportion to the number of units each investor holds, which makes the arithmetic of sharing straightforward.
The main trade-off versus a separate account is control. A pooled fund offers lower cost, easier administration and instant diversification, but the investor cannot tailor the holdings to their tax position or ethical preferences.
For investors with unusual needs or very large sums, a separate account may be worth the extra expense. When comparing pooled funds, look at fees, liquidity terms, the manager's track record, how the fund is regulated and who holds its assets.
These factors decide whether a particular pooled fund suits an investor's purpose, and reading the fund documents is the surest way to find out.
In practice
Real-world examples.
Example
A local authority places spare cash in a pooled money market fund. It receives a daily statement showing units held and value, and can withdraw funds within a day or two. This makes the fund a convenient home for cash that is not needed for the moment but may be needed soon.
Example
A family business owner holds a mix of pooled equity and bond funds in her retirement account. She rebalances once a year by moving units between funds, without having to trade individual securities. Each switch is a simple instruction, and the fund managers handle the underlying trades.
Example
A hospital endowment joins a pooled fund run by a trust company with other endowments. The group's combined size lowers the fees, and the hospital receives the same performance reports as the others. The hospital's board reviews them every quarter alongside its other investments.
Formula
Calculation
Investor's share of income = (units held / total units in issue) x total income distributed
Suppose a pooled fund earns and distributes $400,000 of income in a year, and has 5,000,000 units in issue. An institution holds 400,000 units.
Investor's ownership share = 400,000 / 5,000,000 = 8%.
Investor's income = 0.08 x 400,000 = $32,000.
If the fund charges a 0.5% annual fee on net assets of $50,000,000, total fees are 50,000,000 x 0.005 = $250,000, and the institution's share of those costs is 0.08 x 250,000 = $20,000.Case study
Seen in the real world.
Birchfield Pension Scheme is a fictional plan with $80,000,000 of assets. The trustees compare running separate portfolios with using pooled funds. In this illustrative review, they find that a separate equity mandate would cost 0.45% a year, against 0.30% for a pooled fund.
On $40,000,000 of equity, the difference is 40,000,000 x (0.0045 - 0.0030) = 40,000,000 x 0.0015 = $60,000 a year. The trustees also like that a pooled fund provides instant diversification and independent unit pricing each day.
They place most assets in pooled funds, keeping a small separate account for a specialist strategy. The decision is recorded in the investment policy statement and reviewed each year, and the trustees ask the pooled managers to explain any quarter in which they trail their benchmark.
Watch out
Common mistakes.
- Believing you own the underlying shares. You own units of the fund, and the fund owns the shares.
- Assuming every pooled fund is liquid. Some, such as property funds, may delay withdrawals when many investors want out at once.
- Ignoring that income is shared by units held. A late investor buying units just before a distribution may receive income that was earned before they invested.
Questions
People also ask.
Is a mutual fund a pooled fund?
Yes. A mutual fund is the best known type of pooled fund, offered to the public under securities law.
Are pooled funds cheaper than separate accounts?
Often yes for smaller amounts, because costs are shared, but very large investors can sometimes negotiate low fees for separate accounts, so it pays to compare quotes for both routes.
How are pooled funds valued?
The fund calculates net asset value per unit, usually daily, by valuing all its holdings and dividing by the units issued.
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