Unit trust

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A unit trust is a form of collective investment constituted under a trust deed. A unit trust pools investors' money into a single fund, which is managed by a fund manager. Unit trusts offer access to a wide range of investments, and depending on the trust, it may invest in securities such as shares, bonds, gilts, [1] and also properties, mortgage and cash equivalents. [2] Those investing in the trust own "units", whose price is called the "net asset value" (NAV). The number of these units is not fixed and when more is invested in a unit trust (by investors opening accounts or adding to their accounts), more units are created. [1]

Contents

In addition to the UK, trusts are found in Fiji, Ireland, the Isle of Man, Guernsey, Jersey, New Zealand, Australia, Kenya, Uganda, Namibia, South Africa, Singapore, [3] Malaysia and Zimbabwe.

History

The first unit trust was launched in the UK in 1931 by M&G under the inspiration of Ian Fairbairn. [4] The rationale behind the launch was to emulate the comparative robustness of US mutual funds through the 1929 Wall Street crash. The first trust called the 'First British Fixed Trust' held the shares of 24 leading companies in a fixed portfolio that was not changed for the fixed lifespan of 20 years. The trust was relaunched as the M&G General Trust and later renamed as the Blue Chip Fund. [5]

By 1939 there were around 100 trusts in the UK, managing funds in the region of £80 million. [6]

Different investment structures

There are a number of collective investment schemes — Unit Trust, Open-ended investment company, Mutual fund, Unit investment trust, Closed-end fund — with similar objectives and/or names, sometimes confused with each other. Variations include open-ended and closed-ended, business trust or management company/corporate structure, Actively managed or un-managed.

In the UK there are generally two types of open-ended, actively managed investment companies: [7]

In Western Europe there are

In the United States

Structure

Open-ended

Unit trusts are open-ended; the fund is equitably divided into units which vary in price in direct proportion to the variation in value of the fund's net asset value. Each time money is invested, new units are created to match the prevailing unit buying price; each time units are redeemed the assets sold match the prevailing unit selling price. In this way there is no supply or demand created for units and they remain a direct reflection of the underlying assets. Unit trust trades do not have any commission.

Bid–offer spread

The fund manager makes a profit in the difference between the purchase price of the unit or offer price and the sale value of units or the bid price. This difference is known as the bid–offer spread. The bid–offer spread will vary depending on the type of assets held and can be anything from a few basis points on very liquid assets like UK/US government bonds, to 5% or more on assets that are harder to buy and sell such as property. The trust deed often gives the manager the right to vary the bid–offer spread to reflect market conditions, with the purpose of allowing the manager to control liquidity. In some jurisdictions the bid–offer spread is referred to as the "bid–ask spread".

To cover the cost of running the investment portfolio the manager will collect an annual management charge or AMC. Typically this is 1 to 2 percent of the market value of the fund. In addition to the annual management charge, costs incurred in managing and dealing the underlying assets will often be borne by the trust. If this is the case, the provider will extract revenue equal to the AMC without incurring any expenses managing the fund. This makes the charges in such vehicles lack transparency.

Mechanics

In a unit trust, units are managed within what is known as the "Managers Box". The Box Manager of the fund will make a decision at each valuation point whether or not to Create (add) or to Liquidate (Remove) units based on the final net sales and redemptions prior to the next valuation point where the Fund is priced on a "Forward Basis", or at the actual valuation point where the fund is priced on an Historic basis. Forward pricing is the most common.

The underlying value of the assets is always directly represented by the total number of units issued multiplied by the unit price less the transaction or management fee charged and any other associated costs. Each fund has a specified investment objective to determine the management aims and limitations.

A unit is created when money is invested and cancelled when money is divested. The creation price and cancellation price do not always correspond with the offer and bid price. Subject to regulatory rules these prices are allowed to differ and relate to the highs and lows of the asset value throughout the day. The trading profits based on the difference between these two sets of prices are known as the box profits.

OEIC conversion

In the UK many unit trust managers have converted to open-ended investment companies (OEICs) in recent years. OEICs normally have a single price for purchase and sale, although recent regulatory change now permits dual pricing too, in line with unit trusts.

The motivation for conversion is often cited as a simplification and precursor to offering funds Europe-wide under EU rules.

More cynical observers may have noted that there is increased latitude to hide charges in the OEIC Dilution Adjustment (more commonly referred to as "Swinging Single Price") whilst maintaining the veneer of simplification [ citation needed ].

Taxation

In the United States, unitholders of Unit Trust Funds are often treated as partners for tax purposes. [15] Much like investments in MLPs, unitholders are typically issued a K-1 rather than a Form 1099 at the end of each tax year.

Ways to invest

In the UK, units can be bought direct from the fund manager, held through a nominee account or through an individual savings account (ISA). It is also possible to invest via fund platforms.

From 1 January 1987 to 5 April 1999 it was also possible to invest via a personal equity plan (PEP) however these were discontinued and all PEP accounts automatically became stocks and shares ISAs on 6 April 2008. [16]

See also

Further reading

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References

Notes

    Citations

    1. 1 2 "What is a unit trust?". money.co.uk. Retrieved 11 October 2017.
    2. ↑ "What is a 'Unit Trust - UT'". Investopedia. Retrieved 12 October 2017.
    3. ↑ Lee, Boon Keng and Ong, Andy. Personal Financial Planning in Singapore. INS communications PTE LTD, 1997. p. 120, ISBN   981-00-9422-1.
    4. ↑ "Notes & Comments, The Fixed Trust". The Glasgow Herald. 23 April 1931. p. 12. Retrieved 8 March 2017.
    5. ↑ "M&G Investments. History". mandg.com. Retrieved 12 October 2017.
    6. ↑ For more details of the trust origin of the unit trust and its relationship with American mutual funds, see Sin, Kam Fan (1998). The Legal Nature of the Unit Trust. Clarendon Press. ISBN   0-19-876468-5.
    7. 1 2 3 Russell, Ray (2007). An Introduction to Mutual Funds Worldwide. John Wiley & Sons. pp. 10–12. ISBN   9780470510193 . Retrieved 12 October 2017.
    8. ↑ Akciová společnost s proměnlivým základním kapitálem (SICAV) – právní a daňová specifika EPRAVO.CZ| 8.4.2013
    9. ↑ "Luxembourg SICAV / SICAF" (PDF). seic.com. 2012. Retrieved 12 October 2017.
    10. ↑ "Frequently Asked Questions. Chapter 6 Products - Securities Market. 6.8.2 What are the differences between mutual funds and unit trusts?". HKEX. 2009-08-31. Retrieved 11 October 2017.
    11. ↑ Lemke, Lins and Smith, Regulation of Investment Companies, §9.05 (Matthew Bender, 2014 ed.).
    12. ↑ "Closed-End Fund Information". SEC.gov. U.S. Securities and Exchange Commission. 2013-01-16. Retrieved 2015-12-16.
    13. ↑ Investopedia (2015-05-28). "What is the difference between an ETF's net asset value (NAV) and its market price?". Investopedia. Retrieved 2016-12-10.
    14. ↑ Lemke, Lins and Smith, Regulation of Investment Companies, §4.03 (Matthew Bender, 2014 ed.).
    15. ↑ "Help - Research Glossary: S through Z". www.fidelity.com. Retrieved 2021-02-13.
    16. ↑ "Personal Equity Plans". hmrc.gov. Archived from the original on 25 May 2011.


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