Oran Hall | The anatomy of a unit trust

A unit trust is a pooled investment arrangement that allows investors to invest indirectly in a wide range of investment instruments by buying units in an investment fund, and though not owning the instruments themselves, gain or lose depending on how they perform overall collectively.

Pooling refers to the money of the investors being combined to buy investment instruments for the benefit of all investors.

When a unit trust buys an investment instrument, it is not the individual unit holder who owns it. It is the unit trust that does so. Thus, the investor cannot lay claim to owning any portion of a particular instrument in which the unit trust invests.

Pooling the money of many makes it possible to invest in instruments, such as real estate, that some investors would not normally be able to buy into due to their limited financial resources. Buying units in a fund that invests in such an instrument allows the investor to participate indirectly in its ownership.

A unit trust is generally divided into several funds, which are really investment portfolios. Some funds are dedicated funds, such as equity funds or money market funds. In such cases, they invest primarily in a particular type of security subject to the limits imposed by regulation and the trust deed. An equity fund, for example, may invest in fixed income securities but not above a prescribed percentage of the fund.

Some funds are mixed funds, also called blended funds, that invest in several types of securities. The advantage of such funds is that they obviate the need for investors to invest in multiple funds to meet their objectives. On the other hand, how they invest funds among the various asset classes may not suit some investors.

The names of the funds give a good indication of the instruments in which they invest and of the investment objectives they are meant to satisfy. For example, a money market fund invests in money market instruments, and a capital growth fund invests primarily for capital growth or appreciation.

A fund is valued periodically – some daily, others weekly or at some other interval. Fund values fluctuate with changes in the market prices of the instruments that make up the fund. The net asset value is of great importance. It is the sum of the market value of all instruments in the fund less management and other expenses.

THE BID AND THE OFFER

The funds are divided into units, and the value of each unit is determined by dividing the total number of units into the net asset value of the fund to determine the unit value, which is a very useful and convenient number.

The unit value facilitates the purchase and redemption of units. In many cases, there is just one unit value. In others, there are two – the bid and the offer. The difference between them is the associated selling and marketing expenses that are added to the bid price. In such a case, investors buy at the offer price and sell back their units to the unit trust at the bid price.

The unit value makes it easy for a unit holder to calculate the returns on a unit trust investment by determining the difference between the current price and purchase price and expressing it as a percentage of the purchase price.

As an investment trust, the unit trust is governed by a trust deed, which is a legal document that spells out how the manager and trustee should act in operating the unit trust, thus protecting the unit holders.

The unit trust also has a board of trustees, a corporate body independent of the managers, which acts as the custodian of the investments, cash and income of the unit trust and holds ownership of the investments in trust for the unit holders.

There is also a management company, which is responsible for the day-to-day administration of the unit trust, including the selling and redeeming of units, investing the funds, valuing the units, managing the financial and accounting affairs of the trust, staff welfare, marketing, and promotion.

The way unit trusts are arranged ensures that there is a separation of ownership, custodianship and management, which serves to effectively protect the interests of the unit holders.

Unit trusts that operate in Jamaica must be registered by the Financial Services Commission. The funds are open-end in that the unit trust creates and issues new units when there is demand for them and redeems existing ones, thus making them very liquid instruments.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.

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