Business, Legal & Accounting Glossary
A unit trust is a form of collective investment constituted under a trust deed.
Found in the UK, Ireland, Australia, New Zealand, South Africa and British Isles offshore jurisdictions, unit trusts offer access to wide range of securities for all types of investors.
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.
Unit trusts are open-ended; the fund is equitably divided into units which vary in price in direct proportion to the variation in the 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.
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 spread. Typically the bid-offer spread is 5% but this may vary. 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%.
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.
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 the conversion is often cited as a simplification and pre-cursor to offering funds Europe-wide under EU rules.
More cynical observers have noted that there is increased latitude to hide charges in the OEIC dilution levy whilst maintaining the veneer of simplification.
The first unit trust was launched in the UK in 1931 by M&G. 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 (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 K F Sin, The Legal Nature of the Unit Trust, Clarendon Press (Oxford University Press) 1998.
Units can be bought directly from the fund manager, held through a nominee account or through a PEP or ISA.
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This glossary post was last updated: 18th April, 2020 | 0 Views.