1. Certificate for Introduction to Securities & Investment (Cert.ISI)
49cis
Certificate for Introduction to Securities & Investment (Cert.ISI)
Unit 1
Lesson 49:
Unit trusts
Definition of a unit trust
The types of fund and how they are classified
The roles of the manager and the trustee
OEICs

2. What is a unit trust?
A unit trust is a collective investment scheme. The scheme is in the form of a trust.
The trustee is the legal owner of the underlying assets in the investment scheme. The unit-holders are the beneficial owners of those underlying assets.
A unit trust can be authorised or unauthorised
A UK unit trust must be authorised by the FSA before it can be offered to the general public in the UK.
Investors pay money into the trust in exchange for units. The more people invest, the bigger the trust will grow: it is “open-ended”
Conversely, if investors withdraw their money, (i.e. sell their units back to the fund), the size of the trust will shrink – sometimes to nothing
UK Funds under management - last 10 years (Source: IMA)
The unit trust industry started in 1931, when M&G launched the first unit trust. Today the industry manages £3trn in over 2,000 funds across over 30 different investment sectors. In March 2010, assets under management in British unit trusts and OEICs passed £500bn for the first time. This capped a decade where open-ended products doubled their assets under management.
The money is invested in a diversified portfolio of assets – usually shares or bonds or a mixture of the two
If the portfolio rises in value, the value of the units will increase and vice versa

3. What is the function of a unit trust manager?
A unit trust manager is obliged to buy back units from an investor wishing to sell. They will generate their profits by charging annual management fees and the actual dealing of the units themselves.
The unit trust manager is responsible for a number of different functions including:
The day-to-day managing of the trust fund
Deciding which investments to buy and sell in the financial markets
Or delegating day-to-day investment decisions to separate fund managers
Offering the units for sale
Valuing and fixing the price of the units
Valuation is based on Net Asset Value (NAV) per unit of the underlying investments
Purchasing the units back from the unit holders
The bid price for the units is always lower than the offer price for the units
The spread between the bid and offer price is usually around 5-7%, but unit trust groups are permitted to widen this gap to as much as 10% if there is a run on a fund
A list of unit trust prices from Legal & General as of

4. What is the function of a unit trust trustee?
The trustee will have an important policing role to ensure that the manager complies with the terms of the trust deed, and ultimately to ensure consumer protection. In most cases, the role of the trustee will be carried out by a clearing bank, merchant bank or life company.
The trustee will have the main responsibility of overseeing the unit trust. The trustee's main duties will include:
Holding and controlling trust assets.
Collecting and distributing income from trust assets.
Issuing unit certificates to unit trust investors.
Approving possible adverts and marketing material.
2010 UK Unit Trust Trustees by market share
Source: R&M Surveys

5. Types of unit trust
There is a wide selection of unit trusts, many relating to the nature of their investment objectives. There are however two broad types of unit trusts being “accumulation and distribution”.
Accumulation unit trusts
An accumulation unit trust can be particularly attractive to many higher rate tax payers who are looking for capital growth rather than income. The objective of this type of trust is simply the pursuit of capital growth. Any income received from the underlying assets is immediately poured back into the fund - resulting in an increased value for each unit.
Distribution (or income) unit trusts
This type of unit trust has an altogether different objective - they are primarily geared to produce a high level of income, as well as producing a certain amount of capital growth. The income is then distributed to unit holders as dividends.
BestInvest “Best in Breed” list for UK All Companies funds, December 2010

6. Unit trust charges
Initial charges range from 5-6% and annual management charges (AMCs) from %, depending on the type of fund and degree of specialist management and research required.
For instance, index tracker funds tend to be the cheapest as they are run passively, without much management input needed, so that AMCs on tracker funds can be a low as 0.3%. An esoteric fund invested overseas could have an AMC of up to 2%.
Source:

7. Unit trusts and OEICs
Unit trusts are gradually being replaced by their modern equivalent, the Open-Ended Investment Company, or OEIC. The FSA refers to OEICs as Investment Companies with Variable Capital (ICVCs). In continental Europe, they are known as SICAVs (Société d’Investissement a Capital Variable).
OEICs (pronounced 'oiks') were first sold to UK investors in The FSA's rules governing which types of fund can convert to OEIC s were relaxed in 2001 and since then, the majority of fund management groups have converted their unit trusts to OEICs or launched these funds.
Unit trusts and OEICs are both open-ended investments. However, there are some key differences. An OEIC is structured as a company, not as a trust, but it is not registered at Companies House.
Key difference: Pricing
When investing in unit trusts, you buy units at the offer price and sell at the lower bid price. The difference in the two prices is known as the spread. To make a return on your investment the bid price must rise above the offer before you sell the units. An OEIC fund has a single price, directly linked to the value of the fund's underlying investments. All shares are bought and sold at this single price, so there is no need to calculate the spread. The OEIC has been described as a 'what you see is what you get product'.
Traditionally, unit trusts have used dual pricing (bid and offer) and OEICs have used a single mid-market price. But they can choose either method.

8. Unit trusts and OEICs Key difference: Complexity
In legal terms, unit trusts are much more complex. In fact, this is the main reason for their rapid conversion to OEICs. Unit trusts entitle an investor to participate in the assets of the trust, without actually owning those assets. Investors in an OEIC, meanwhile, buy shares in that investment company.
Key difference: Management
With unit trusts, the fund's assets are protected by an independent trustee and are managed by a fund manager. OEICs are protected by an independent depository and managed by an Authorised Corporate Director (ACD).
The ACD functions in a way very similar to the manager of an authorised unit trust.
The depository functions in a way very similar to the trustee of an authorised unit trust, and oversees the activities of the ACD
Key difference: Cost
OEICs are cheaper to run than unit trusts because they can contain a number of sub-funds, rather than each unit trust needing to be a separate entity. This cuts down on the costs of administration. In theory, this should lead to lower charges for investors.

9. Pricing and charges
Unit trusts use the spread between Bid and Offer prices to recoup dealing expenses and commissions paid to brokers.
As most OEICs use a single mid-market price, that is not possible. OEICs can recoup these expenses by applying a separate charge, called a “dilution levy”
The maximum price at which unit trust or OEIC fund managers can sell units or shares to the public is now determined by the FSA. It is know as the:
The maximum buying price, which comprises:
The creation price (NAV plus an allowance for dealing costs)
The fund manager’s initial charge
Example:
Value of the portfolio (at offer prices) divided by the number of units
Add allowance for dealing costs (e.g. brokerage at ¼%)
Add Stamp Duty at ½%
Sub-total (i.e. creation price)
Add fund manager’s initial charge (e.g. 6.55%)
Maximum buying price
100.00p
NB: The manager can waive part of the fees in response to sluggish market conditions
0.25p
0.50p
100.75p
6.55p
107.30p
When an investor wishes to sell the units back to the manager , the minimum selling price is the price at which the units are cancelled and the money returned from the fund

10. Dealing and settlement
Investors can buy or sell units / shares in a number of ways
Direct to the fund manager (by phone, internet, post etc)
Via a broker or financial adviser
Through a fund supermarket
Fund supermarkets are usually internet-based platform which offers investors easy access to a range of unit trusts and OEICs from different providers
Fund supermarkets will take investors’ orders and process them on their behalf, usually at reduced commission rates.
BestInvest “Spot the Dog” list for UK All Companies funds, December 2010
They offer on-line dealing, valuations and performance tracking
Investors can look at their various holdings in one place and switch from one fund to another

11. Dealing and settlement
All unit trust units or OEIC shares are bought from, or sold back to, the authorised fund manager. There is no secondary market in units or shares except between the investors and the fund managers. They are not bought and sold on stock markets.
A fund supermarkets will use a systems platform to execute a buy or sell order from a client.
A typical systems platform is EMX
Firms enter orders which are then sent electronically to the fund management group
The firm then receives an electronic order receipt and the deal is traded at the next valuation point
Settlement takes place directly with each fund management group. The fund manager has four days from receipt of the instruction to settle the trade and remit the proceeds to the investor
Since 2009, instructions no longer have to be in writing. They can now be effected over the internet or telephone.
EMX was taken over by Euroclear (the parent company of Crest) in 2006