Legal security of investment fund assets in portfolio management company investigations
While investigations into portfolio management companies have heightened concerns regarding investment funds, experts stated that fund assets and portfolio management company assets are legally kept completely separate.
Recent investigations targeting managers of portfolio management companies have increased concerns regarding investment funds, while market experts explained that the fund assets and the portfolio management company's own assets are separate from each other, and fund assets are kept in separate accounts by the portfolio custodian.
Legal Structure of Investment Funds
An investment fund operates as a separate pool of assets managed on behalf of participation share holders and in accordance with fiduciary ownership principles.
Investors become partners in the economic results of the fund portfolio through the participation shares they purchase, and changes in fund value are reflected in the share value.
Safekeeping and Segregation of Assets
Fund assets are kept completely separate from the portfolio management company's own assets and are monitored in separate accounts opened in the name of the fund.
The portfolio custodian regularly tracks the movements of fund assets and fully performs the controls imposed upon it by legislation.
Limited Powers of Managers
The portfolio manager's authority over fund assets does not include unlimited disposition power, and transactions are executed on behalf of the fund.
Managers do not manage these assets for their own accounts, but rather within the framework of the investment strategy, internal regulations, prospectus, and relevant legislation.
Market Value and Liquidity Risk
While these legal mechanisms do not completely eliminate the investment risk borne by the investor, the primary risk stems from declines in market value.
In open-ended investment funds, investors selling their shares creates a cash need for the fund, and liquidity is of critical importance at this stage.
Impact of Sales on Prices
As the fund makes sales, buy orders in the market withdraw, and increasing sales volume leads to transactions being executed at lower prices. This situation transforms the liquidity problem into a pricing problem and can make the portfolio to which remaining investors in the fund are exposed less liquid.