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.

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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.

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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.

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Main Parties to a Unit Trust

The three parties to a Unit Trust are the:

• trustee
• manager
• unit holder (beneficiaries)

The trustee:

- 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

The Manager:

- Invests the monies
- Markets the fund
- Values the fund
- handles communication
- Reports to the Trustee
- Reports to the unit holders

The Investor

- Entitled to full share of gain (capital and income)
- May remove either trustee or manager
- Exercises control by switching

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Costs/Charges

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 6%.

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.

Other Charges

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.