Unit Trusts

What is a Unit Trust?

In technical jargon, a Unit Trust is an open-ended collective investment constituted under a Trust deed.

In plain English, it is a highly popular way for an individual to place money into a fund jointly with others, in order to spread risk over a wider range of investments than might be possible for a single investor, to have the fund professionally managed, and to share the costs of doing so.

By "open-ended" is meant that the fund is equitably divided into units which vary in price in direct proportion to the change in value of the fund's net asset value. Each time money is invested, new units are created to match the current unit buying price; each time units are redeemed, the assets sold match the current unit selling price. In this way there is no supply or demand created for units and 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.

In contrast, Investment Trusts, which we explain elsewhere, are "closed-ended" meaning that they issue a fixed number of shares when they come to market, and then only very rarely buy shares back or issue new shares. That means that their price may fluctuate not only because of market movements, which are directly reflected in the asset value of the Investment Trust, but can go to a premium (a % above) or discount (a % below) the asset value, relecting demand in the market for the Investment Trust´s shares. A Unit Trust´s price, on the other hand, always reflects more closely the underlying assets, and never moves to a premium or discount.

How do I invest in a Unit Trust ?

You can buy units direct from the fund manager (sometimes online), or through an Independent Financial Adviser. Allenbridge, unlike many IFAs, will ensure that you receive not only the best possible discounts, so that as much of your money as possible is invested, but will also keep you in touch with your investment through regular valuations, and share with you their high quality and experienced research on the Unit Trust market.

When you have bought units in a Unit Trust, you own the right to benefit from the growth of assets and income of the underlying funds (the corollary is that, as the value of assets or dividends falls, your share in the decline).

The Trust is governed by two important documents:
firstly, the Deed of Trust, which covers:

• the name of the trust, which has to be aligned with its stated objectives
  (so, for example, no trust would be allowed which called itself the "Cast Iron Returns Trust", when its objectives were investment in South American minerals exploration)
• the law which governs it - usually that of England & Wales
• a statement that the Trust must invest in FSA-defined eligible markets
• a declaration that the trust deed is binding on unitholders, trustees and managers and that the trust assets are held by the trustees on behalf of the unitholders

...and secondly, the Scheme Particulars, which cover:

• details of the managers and trustees
• the Trust´s objectives
• the types of units issued (i.e. distribution or accumulation)
• the dealing days and the valuation point (i.e. the time of valuation)
• the charges
• the minimum investment levels

and is overseen by an independent trustee (usually a large insurance company or bank). All Unit Trusts are authorized and regulated by the FSA.

How are Unit Trusts priced?

Unit Trusts quote both a "bid" and "offer" price. The bid price, the lower of the two, is the price you will get for each unit if you sell your units back to the fund company. It is based on the stockmarket bid price of the fund´s underlying securities. The (higher) offer price is the price you will pay for each unit to purchase units in the fund. Any sales charge is built into the offer price.

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 Manager can make trading profits (known as "box profits" based on the difference between these two sets of prices, known as the bid-offer spread. Typically the bid-offer spread is 5% but this may vary.

So, if you invest £10,000 in a Unit Trust with a 5% spread, the actual amount that will be invested in units is only £9,500.

The "missing" £500 goes partly in commissions for your financial adviser (or not, if you are lucky to have Allenbridge as your adviser).

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.
To cover the cost of running the investment portfolio the manager will also collect an annual management charge or AMC. Typically this is 1% to 1.5%.