Trust Based Collective Investments

There is only a single trust based collective investment in the UK and that is the unit trust. The somewhat confusingly named investment trust is actually a corporate based investment.

Unit trusts are set up by a trust deed which must be approved by the Financial Services Authority (FSA). The trust deed sets out the investment objectives of the fund and any restrictions which may be placed on the choice of underlying investment. It also identifies the trustees and managers of the trust.

The trustees are the registered holders of the trust's assets and are charged with keeping them safe on behalf of the investors. They are also required to ensure that the trust managers do not breach the rules and, if they do, report the matter to the FSA. In the event of a serious breach they have the power to remove a manager.

The managers of the trust effectively run the commercial side of the investment and are responsible for:

• marketing the trust;
• managing the assets;
• maintaining the unit holder register;
• performing the reporting requirements to the FSA and other bodies.

There are two main forms of unit trust units, namely:

• distribution, where the underlying income is distributed on a set regular basis; and
• accumulation, where the underlying income is retained and invested in investments.

Charges
Unit trust companies have traditionally quoted two prices: the buying/offer price and the selling/bid price. Each of these prices is calculated according to a formula in the trust deed approved by the FSA:

• The buying price is the price at which the units are offered for sale to the investor.
• The selling price is normally 5-6% below the buying price. This is the price at which the fund managers will buy back the units (the sale price from the investor's perspective).

The difference between the buying and selling prices is the bid-offer spread.

The issuers also have the ability to move the price of units depending on the relative balance of purchases and sales. The creation of new units means that more assets will need to be purchased using the money raised. This will incur the following additional costs:

• the buying and selling spreads of the underlying assets;
• commission on the asset purchases; and
• stamp duty reserve tax (on asset purchases only).

Some unit trusts have come into line with Open-Ended Investment Companies (OEICs) and offer single pricing, with the charges being made up by bigger annual management costs and/or exit penalties.
There is also an annual management charge in the region of 0.25-2% per annum. However, this will vary with the underlying assets and any special function that the fund might offer (e.g. monthly distribution payments).

For more information, please contact us.