Learning Material Sample
Investment and risk5.1 Unit trusts and OEICs - unit trustsIn this section, we describe in detail, the structures, pricing, charges, uses and methods of analysis of unit trusts.
Unit trusts are collective investment schemes set up under trust deeds. They are run by both trustees who have the responsibility of holding investments and overseeing the operation of the trusts, and managers are responsible...
Shortened demo course. See details at foot of page. ...centage of the value of the ongoing fund (eg 0.75% to 1.5%).There are several different types of unit trust which aim to provide capital growth, income or a combination of the two. We shall explain more about these below. Unit trusts are grouped into over 30 performance sectors to allow investors to make worthwhile comparisons and effective decisions on investment.
These categories are de... Shortened demo course. See details at foot of page. ...TS schemes (mixed funds) and Non-UCITS schemes. Further changes from 1 April 2004 also classified funds as “Retail” or “Qualified Investor” Schemes. The sectors provided above give an overall guide as to the activity of the unit trust’s investment management philosophy.
In each sector, some funds may invest in smaller companies, recovery situations, “mid cap”, blue chip, ethical investments etc The IMA’s “UK All companies” sector can be further divided into sub sections for e... Shortened demo course. See details at foot of page. ...services that are considered morally or environmentally damaging, eg arms companies, tobacco etc. Some strategies adopt a more neutral approach in order to accommodate larger companies, who perhaps behave in a more ethical way with their overall company policies but who would have otherwise been seen to have certain activities that are unattractive to the ethical stance. Rules exist to ensure that unit trusts are diversified in terms of the assets held within their funds.
For example: Unit trusts that are UCITS Retail Funds that invest mainly in securities but are not index tracker funds, cannot hold... Shortened demo course. See details at foot of page. ...riod. Most fund managers retain up to 5% of their assets in cash although new FCA limits impose no restriction. If however, high amounts of cash are held for too long then they could be reclassified under the IMA sector classifications. A retail un...
Shortened demo course. See details at foot of page. ...conditions. The roles of managers and trustees are defined by the FCA to ensure that adequate protection is levied on the consumer.
Trustees legally hold the assets of the trust on behalf of unit holders under the terms of the trust deed. Managers are responsible for ongoing operation of the trust including promotion, investment and administration. Both manager and trustee must be incorporated under UK law or other European member state and have a place of business in the UK. The manager must be suitably authorised to carry out investment business in the UK and be subject to the rules set out by the regulator. The trustee must be regula... Shortened demo course. See details at foot of page. ...ment is carried out by the manager or sub contracted to a third party. The register evidences the investor’s title over the unitsIt must contain the following: Name and address of the unit holder Number of units of each type held by the unit holder Date on which the holder was registered. Under FCA regulations, the manager and the trustee must take all reasonable steps to ensure the register is at all times complete and up to date. Reporting Unit trusts must publish an annual report detailing the trust’s accounts and must also publish half yearly reviews allowing unit holders to monitor their performance. If it is to be marketed to the general public a unit trust needs authorisation from the FCA.
If it is not authorised, it cannot be promoted and marketed to th... Shortened demo course. See details at foot of page. ...ey are subject to income tax rather than corporation tax. Another important use of unauthorised unit trusts is for managers of enterprise zone property holdings. Internal taxation of the unit trust
Any unfranked income arising within a unit trust will be subject to corporation tax of 20% after deduction of ... Shortened demo course. See details at foot of page. ...restAny capital gains made by the investor will provisionally be subject to capital gains tax subject to any allowances and exemptions.
Buying and selling unit trusts can be carried out in many different ways eg telephone, Internet, newspaper adverts, via a financial adviser etc.
Buying Where purchases go ahead, the provider must send a contract note giving particulars of the transaction. Key features documents must also be provided to the investor, showing charges and other main details of the trust. The issue of certificates are not compulsory and the manager need not be obliged to issue one. Many unit trusts have moved over to non-certified units. This avoids the need to send a certificate every time a transaction takes place. Proof of purchase with this method will be the contract note whilst proof of ownership will be the entry on the register. Selling To sell units an order is placed with the management group who then provide a contract note. If the investor holds a certificate, he must sign a renunciation form on the back of it and send the certificate to the manager. The manager must pay the certificate holder no more than 4 business days after receipt of the signed documentation. Where investors only wish to sell some of their units, they must send in their certificates where available, indicating on the renunciation form how many units they wish to encash or how much cash they require. The management group will then issue a new certificate detailing the balance of units held. Share exchange Under these schemes, the unit trust’s manager can offer favourable terms to swap an inve... Shortened demo course. See details at foot of page. ...r deal:Forward Prices at the next valuation point, or Historic prices at the last published valuation point. Most unit trust managers now deal on a forward basis. Historic pricing The manager will create a stock of units at the valuation point on the basis of the anticipated level of sales until the next valuation point. These are sold at the known historic price. If there aren’t enough units, the manager must either move to a forward basis or continue on an historic basis and risk losing money if the market moves against him. Historic pricing does have an advantage in that investors can be offered a certain price when they place a deal. If the market is very volatile, historic pricing could result in inequity between buyers, sellers and existing unit holders. Forward pricing This is where the investor buys units at the next price to be calculated. The price of units is not known or the number of units to be bought but the investor can be sure of a fair and current price. When working on a forward basis, the manager will create enough units to cover any orders undertaken at the next valuation point. Current regulations require that a manager must create units within two hours of the valuation point, although new regulations allow 24 hours. Managers working on an historic pricing basis must move to a forward basis if the value of the trust is believed to have altered by 2% or more since the last valuation or the valuation takes over 2 hours to complete. Initial charge
This is included in the buying price of units to the public Most equity funds have a charge of around 5% - 6% Gilt and Fixed Interest Funds often have a lower initial charge of around 3% in line with the lower dealing costs Cash and money mar... Shortened demo course. See details at foot of page. ... service.Performance related charge The new COLL regulations make provision for performance related fees eg managers can receive a bonus based on 20% of the year’s growth of the fund or they can be based on out performance in relation to an index benchmark. |
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