FACTS FOR INVESTORS.

Auckland Star, Volume LXVII, Issue 289, 5 December 1936, Page 4

FACTS FOR INVESTORS.

FIXED OR UNIT TRUSTS. EXPERIENCE IN BRITAIN. METHODS OF OPERATION". The fixed trust movement which lias now* reached this Dominion had its origin in the United States in the twenties of the present century, and suffered a reverse following the slump of 1929. The first fixed trust company in Great Britain of this century was formed in 1931, and though the progress was slow in the first year, in subsequent years there was a great rush of new companies formed on fixed trust lines. To-day about 50 companies are carrying on business there, and the amount invested is estimated at £50,000, €00.

The fixed trust is designed to appeal to the small investor who has hitherto been forced if he desired safety to _bc content with Government stocks, with fixed deposits or with savings bank deposits. The object is to obtain better yielding investment for the small investor and to spread in the same way that a large investor is able to do, the risk which ordinarily accompanies a higher yield. The fixed trust buys shares in specified companies. The purchases so made form a unit of which sub-units are made for sale. A purchaser of a sub-unit or a number of sub-units has thus a proportionate interest in a portfolio holding a well-diversified class of shares. The unit is credited with the dividends received from the different shares held, and the dividends so received are distributed among the sub-units. If a company in which "the unit holds shares makes a bonus issue or an issue at par or at a premium below the market value, the benefit accrues to unit, and so to the owners of the sub-units. Sub-units are not quoted on the Stock Exchange. They are purchased from the fixed trust company which determines the prices at which the sub-units shall be sold each day, according as the prices of the shares in the unit vary. In Britain most fixed trusts undertake to re-purchase any of their sub-units which are offered fo them for sale.

The fixed trust company arranges wit] ndependent trustees to act as custodian jf the shares which comprise cacli unit oi lie trust. The shares comprising each unit ire actually registered in the names ol lie trustees who issue the sub-unit certificates direct to the investor. Thus the ixed trust is a trust in the strictest legal iense being based on a deed of trust made jetween the management company and the nistodian trustees. It is not a company ssuing its own shares or debentures. This s the dominant feature of this type of rust, and authoritative opinion in Britain igrees that the success of the Unit Trusts .here lias been largely due to the high standing of the trustees, who have usually icen either a bank or an insurance com'any. Arranging For Expenses. The fixed trust company pays its expenses and obtains its profit by adding to the price of each sub-unit beyond the appropriate fraction of the aggregate purchase price of all the securities in the unit a« Quoted on liie Stock Exchange, the costs which would be incurred in making such a purchase, a specified loading charge and an amount to make up the price of the sub-unit to the nearest threepence. One advantage to the purchaser of a sub-unit is that he will participate in a spread of investments which should yield a better return than Government stocks, and considerably better that deposits in a bank or a savings bank, with an outlay proportionately just a little more than would he the outlay of a large investor who is able to buy a sufflcency of different stocks so as to spread his risks widely. Also, in the same manner, he will benefit from capital accretion through the issue of bonus shares or through the issue of shares at a price below the market value, and if there has been a general rise in share values ho will benefit in his capital should he decide to sell his sub-units. Later developments in fixed trusts give them more of the character of flexible trusts. In the fixed trust proper the shares in the portfolio arc limited to those of which it advises the unit will consist. This has disadvantages. Some of the shares of the portfolio may showsigns of casing, and the management of the trust may consider that it would be well to sell and buy other shares. In la tor fixed trust companies the management has been given t]>e power to scl' under certain circumstances and buy shares of other companies. The investav* 'H<t (ixed. and the trust bocomci? of a flexible character. Question of Management. Holders of sub-units have no voice in the direction of the trust. This is in the hands of the management company, but investors iire safeguarded by certain powers given to the trustees. While the trustees have no responsibility for the management they have power of supervision and veto, and once a trust is constituted no change can take place in it without the trustees' consent. Also power is usually given to the trustees to remove the management company if the trustees think fit or if a body of sub-unit holders demand it. As a trust continues to buy the securities advertised in its portfolio so long as it grows, it has been suggested that this automatic buying will disturb prices disproportionately to the amonn', involved. In Britain the movement throughout its course has been favoured with markets generally advancing. Should a marked reaction occur and holders of sub-units, becoming nervy, demand that the trust company re-purchase sub-units, the managers, if they were unable to find buyers of the sub-units offered for sale, would be compelled to sell a large amount of underlying securities on a falling market, thereby developing a tendency to depress the market still further. Certain recommendations for protecting the holders of sub-units have been made in two reports, one by a of the London Stock Exchange, and the other by a departmental committee of the British Board of Trade. After an exhaustive survey of the fixed and flexible trusts in Great Britain, the "Economist" considers that the movement has been successful.