The Nature of Unit Trusts
A unit trust works by pooling money from a number of investors and then using this
money to buy a variety of investments. It gives you greater buying power, allows you to
share costs and gives you the benefits of professional management
When you invest, you buy 'units' - and the
cost of each unit is the 'unit price'. The unit price moves up and down to reflect the
value of the investments in the fund. Many income funds' unit prices stay at $1 as profits
or income is ditributed.
A Unit Trust may aim to provide either
regular investment income with a small element of capital growth or, conversely, may aim
to provide strong capital growth with little or no regular income for investors. Before
investing it is the investors responsibility to ensure that they clearly understand the
mandate of the fund.
This information is contained in each
funds respective investment statement which can be requested here.
History of Unit Trusts
Unit Trusts originated in the United
States where they are known as "Mutual Funds".
After the second world war , unit trusts
continued to flourish in Australia but attempts to set up unit trusts in New Zealand were
blocked by the Capital Issues Committee. In the late 1950's there was a change of heart on
the part of government and in 1960 the Unit Trusts Act was passed.
Investment in Unit Trusts has grown very
rapidly in recent years. Approxiamtely 16 trusts were registered at the end of 1986, over
a hundred in 1999 and now approximately 450 managed funds are now actively marketed by New
Zealand Fund Managers.
Nature of a Trust
A trust is a legal structure that comes
into existence when the person hoding the legal title to property (i.e. legal ownership)
is bound by an obligation to hold his interest in the property not for their own exclusive
benefit but for the benefit of other persons.
Main Parties to a Unit Trust
The three parties to a Unit Trust are the:
- unit holder (beneficiaries)
- Holds legal title
- Ensures compliance with trust deed
- Audits accountants
- Distributes income
- Releases money to manager for investment
- Protects rights and interests of unit holders
- Invests the monies
- Markets the fund
- Values the fund
- handles communication
- Reports to the Trustee
- Reports to the unit holders
- Entitled to full share of gain (capital
- May remove either trustee or manager
- Exercises control by switching
The Prospectus and Investment Statement
issued by a Unit Trust Manager clearly states the costs, charges and fees associated with
investment in the particular trust. Investment statements may be requested here.
Initial Charge or Service Fee
This charge is included in the sell price
of units and varies quite widely depending on the type of trust, but can be up to
Recurring Management fee
This fee is paid out of the Trust income
or assets and is therefore not charged directly to each unit holder. While it can vary
quite widely depending on the type of trust, it is normally in the range of 1% to 1.5% per
annum of the value of the assets.
Many trusts make a minor additional charge
to pay for the trustee's services. This is usually in the range of 0.1% to 0.15% per annum
of trust assets and is deducted from the trust income or assets.
Some Unit Trust managers make further
deductions from the trust income in respect of administration expenses, disbursements,
audit fees and the like. These expnses when charged separately do not normally exceed 0.5%
per annum of the value of the of the Trust assets.