Other Investment Organizations

There are intermediaries not formally organized or regulated as investment companies that nevertheless serve functions similar to investment companies. Two of the more important are commingled funds and real estate investment trusts.

Commingled Funds Commingled funds are partnerships of investors that pool their funds. The management firm that organizes the partnership, for example, a bank or insurance company, manages the funds for a fee. Typical partners in a commingled fund might

108 PART I Introduction be trust or retirement accounts which have portfolios that are much larger than those of most individual investors but are still too small to warrant managing on a separate basis.

Commingled funds are similar in form to open-end mutual funds. Instead of shares, though, the fund offers units, which are bought and sold at net asset value. A bank or insurance company may offer an array of different commingled funds from which trust or retirement accounts can choose. Examples are a money market fund, a bond fund, and a common stock fund.

Real Estate Investment Trusts (REITs) A REIT is similar to a closed-end fund. REITs invest in real estate or loans secured by real estate. Besides issuing shares, they raise capital by borrowing from banks and issuing bonds or mortgages. Most of them are highly leveraged, with a typical debt ratio of 70%.

There are two principal kinds of REITs. Equity trusts invest in real estate directly, whereas mortgage trusts invest primarily in mortgage and construction loans. REITs generally are established by banks, insurance companies, or mortgage companies, which then serve as investment managers to earn a fee.

REITs are exempt from taxes as long as at least 95% of their taxable income is distributed to shareholders. For shareholders, however, the dividends are taxable as personal income.

The Real Estate Profits

The Real Estate Profits

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