Unit trust
Encyclopedia
A unit trust is a form of collective investment
constituted under a trust deed.
Found in Australia
, Ireland
, the Isle of Man
, Jersey
, New Zealand
, South Africa
, Singapore
, Malaysia and the UK
, unit trusts offer access to a wide range of securities.
Unit trusts are open-ended investments; therefore 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.
. 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.
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 pre-cursor 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 .
under the inspiration of Ian Fairbairn
. The rationale behind the launch was to emulate the comparative robustness of US mutual fund
s 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 (Source M&G).
By 1939 there were around 100 trusts in the UK, managing funds in the region of £80 million. (Source M&G)
For 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
(Personal Equity Plan ) or ISA
(Individual Savings Account).
Collective investment scheme
A collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group...
constituted under a trust deed.
Found in Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
, Ireland
Ireland
Ireland is an island to the northwest of continental Europe. It is the third-largest island in Europe and the twentieth-largest island on Earth...
, the Isle of Man
Isle of Man
The Isle of Man , otherwise known simply as Mann , is a self-governing British Crown Dependency, located in the Irish Sea between the islands of Great Britain and Ireland, within the British Isles. The head of state is Queen Elizabeth II, who holds the title of Lord of Mann. The Lord of Mann is...
, Jersey
Jersey
Jersey, officially the Bailiwick of Jersey is a British Crown Dependency off the coast of Normandy, France. As well as the island of Jersey itself, the bailiwick includes two groups of small islands that are no longer permanently inhabited, the Minquiers and Écréhous, and the Pierres de Lecq and...
, New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
, South Africa
South Africa
The Republic of South Africa is a country in southern Africa. Located at the southern tip of Africa, it is divided into nine provinces, with of coastline on the Atlantic and Indian oceans...
, Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
, Malaysia and the UK
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, unit trusts offer access to a wide range of securities.
Unit trusts are open-ended investments; therefore 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.
Structure
- The fund manager runs the trust for profit.
- The trustees ensure the fund manager keeps to the fund's investment objective and safeguards the trust assets.
- The unitholders have the rights to the trust assets.
- The distributors allow the unitholders to transact in the fund manager's unit trusts
- The registrars are usually engaged by the fund manager and generally acts as a middleman between the fund manager and various other stakeholders.
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 trust 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 spreadBid-offer spread
The bid–offer spread for securities is the difference between the prices quoted for an immediate sale and an immediate purchase...
. 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
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 UKUnited Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
many unit trust managers have converted to Open-Ended Investment Companies
ICVC
An Open-ended investment company or Investment Company with Variable Capital is a type of open-ended collective investment formed as a corporation under the Open-Ended Investment Company Regulations 2001 in the United Kingdom...
(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 pre-cursor 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 .
History
The first unit trust was launched in the UK in 1931 by M&GM&G
- M&G Investments :M&G is a leading investment manager in the UK and overseas. It is an autonomous business within the Prudential Group, running its own retail and institutional funds operation and functioning as the asset manager for Prudential in Europe...
under the inspiration of Ian Fairbairn
Ian Fairbairn
Ian Fairbairn was a British financier and rower who competed in the 1924 Summer Olympics.Fairbairn was the son of Stephen Fairbairn and his wife Eleanor née Sharwood. He was educated at Eton, and then attended Royal Military College Sandhurst, and was commissioned as a second lieutenant in the...
. The rationale behind the launch was to emulate the comparative robustness of US mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
s 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 (Source M&G).
By 1939 there were around 100 trusts in the UK, managing funds in the region of £80 million. (Source M&G)
For 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
Ways To Invest
Units can be bought direct from the fund manager, held through a nominee account or through a PEPPersonal Equity Plan
In the United Kingdom a Personal Equity Plan was a form of tax-privileged investment account. They were introduced by Nigel Lawson in the 1986 budget for Margaret Thatcher's Conservative government to encourage equity ownership among the wider population. PEPs were allowed to contain collective...
(Personal Equity Plan ) or ISA
Individual Savings Account
An Individual Savings Account is a financial product available to residents in the United Kingdom. It is designed for the purpose of investment and savings with a favourable tax status. Money is contributed from after tax income and not subjected to income tax or capital gains tax within a holding...
(Individual Savings Account).
See also
- Collective investment schemeCollective investment schemeA collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group...
s - Investment Company with Variable Capital
- Investment trustInvestment trustAn Investment trust is a form of collective investment found mostly in the United Kingdom. Investment trusts are closed-end funds and are constituted as public limited companies....
Further reading
- Sin, Kam Fan (1998) The Legal Nature of the Unit Trust. Clarendon Press ISBN 0-19-876468-5
External links
- The FSA regulates unit trusts in the UKUnited KingdomThe United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
under their CIS (Collective Investment Scheme) rules.