A popular partnership

Press, 23 September 1987, Page 43

A popular partnership

By J. B. HINDIN Unit trusts have become a very popular form of investment, particularly for those unable or unwilling to become involved in the selection and management of their own investments.

A unit trust is a bit like a partnership where a lot of people put their money into an investment pool, held in the name of a trustee and managed by managers who invest that money and look after the investments. Because of the managers’ expertise, or that of the experts they employ, the return to the partners, who are called “unitholders,” should be better than what they could achieve on their own account.

Also, because the investment pool is usually of a much greater size than the average unitholder could hope to achieve, there is much greater scope to spread the investments over a wider range (in other words to diversify) and advantage can be gained from participation in special deals, bulk purchases, sub-underwriting and so on, that are not normally available to the smaller investor.

The managers do all the paper work and deal with ail the ongoing ad-

ministration that results from a portfolio of company shares or property, or whatever the unit trust invests in.

The unitholder buys a number of units (which represents a fraction or a share of that investment pool) and receives a unit certificate and then normally half yearly reports and distribution (dividend) cheques.

The unitholder is shielded from the avalanche of paper that accompanies share investment — company reports, bonus issue certificates, cash issue entitlements, take-over offers, newsletters, dividend election notices etc ... from maybe 10, 20 or more companies.

And similarly in the case of property investment, the unitholder is spared the tedium of dealing with tenants, rent reviews, insurance, repairs and maintenance, lease renewals, title deeds, mortgages, caveats and so on.

The units are valued, usually weekly, on the basis of the current value of the assets held in the investment pool, and this determines what people wanting to buy units have to pay for them, and similarly what the unit trust will pay to redeem units from those unitholders who want to cash up. But obviously the managers who administer the unit trust, select the investments and look after the paper work, have to be paid for the service they provide. So, there is an extra loading (front end loading), usually 5 to 8 per cent on top of the price you have to pay the unit trust to buy units. This is why you see two prices in the published quotes of unit trusts, in the newspapers — usually on a Saturday. The higher quote is what you pay to buy, the lower, what you receive if you sell. The difference is a fee to the managers which recoups

the initial costs of setting you up as a unit holder, including the commission of the agent through whom the business was placed. The ongoing costs of running the unit trust are met by a further management fee of anything from about 1 per cent to 2.3 per cent a year, levied semiannually on the value of the investment pool. Some managers pay all the costs of running the unit trust out of these levies, but others charge additionally to cover the trustee’s fee, usually around 0.1 per cent a year of the value of the fund (all unit trusts are required by law to have a properly authorised trustee). Some also charge additionally for the cost of the audit, accounting, printing and distributing the semi-annual report, maintaining the register of unitholders and so on. While these charges may appear to represent a heavy burden, if the unit trust you select has a track record which shows a better than average performance — hopefully significantly better — after these charges have been met, then you are getting value for money. You have to pay for quality.

The unit trust of which I am the founder and now the chairman is the oldest public unit trust in New Zealand. It was launched in 1960 and until three or four years ago was (as far as I am aware) the only one in the field. Now, after the sharemarket boom, there are about 90 of which about 15 are of New Zealand origin and the rest Australian or foreign. So there are plenty to choose from.

But how do you make a choice, where do you get the information from and what questions do you ask to enable you to make an informed decision?

The first thing you have to do is decide what sort of a unit trust would suit you. There are trusts that invest in listed company shares in New Zealand, Australia or worldwide. There are trusts that invest in commercial property, in gold, in mining companies or in futures. There are trusts that concentrate on investments that produce a high immediate income, but little prospect of capital growth, and others, little immediate income but prospects of future capital growth.

Every unit trust that seeks to sell units to the public is obliged by law to publish a prospectus and

a basic minimum of information must be supplied in that prospectus. So, before buying units, look at the prospectus. You can obtain a prospectus from any sharebroker or by completing and posting the coupon supplied as part of most of the unit trust advertisements in the newspapers and the financial press. The prospectus will give you enough general information to determine whether the investment policy the trust pursues fulfils your particular objectives, (income, capital growth, shares, property etc. ...).

Then you should check who the people behind the trust are. Who are the managers? Are they well known? Who is the trustee? Who are the directors of the management company? Are they directors of other well-known companies?

Then what about the track record? How good is the performance? How far does it go back. If it is only a recently established trust how good is the record of the managers? Are they well established or are they Johnnies come lately, cashing in on the recent sharemarket boom? What are the management charges? Are they higher than average, or lower, and if higher, is that compensated by a superior performance? Remember the higher the charges, the better the performance that is required to justify those charges. And remember too, it is sustained good performance over a long period that counts — not the last three or six months. What commission is payable to the broker or the agent or the salesman through whom you are doing the business? The average is 2.5 to 3.5 per cent which is normally paid out of the front end loading (previously explained) that the managers levy on the sale of units. If the commission is 5 per cent or 6 per cent or more, that might indicate some “hard sell” you might be subjected to and the need for you to resist being pressured into making too hasty a decision or buying more units than you intended to. Having satisfied yourself that the investment philosophy of the trust is along the lines that suit your requirements, that the people behind it are reputable, well known and established, the track record over a reasonable number of years, either of the trust itself or other

trusts or investments managed by the managers, is sound, the management charges and the agent’s commission are reasonable, there are still questions you might want answered before committing your hard-earned money.

For instance, you might ask about the tax position. Unit trusts in New Zealand are taxed as though they were companies. The dividends they receive are non accessible but interest and rent are taxed. Generally the distributions paid to unitholders are taxable in their hands. However, when “imputation” is introduced in 1988, there will be changes — hopefully to the benefit of unitholders. The tax treatment is different in Australia and elsewhere and should be inquired into. A potential investor needs to know the tax implications, particularly as they affect the offshore trusts. You might also ask for the provisions regarding the redemption of units (the buy back by the trust when you want to sell back your units) to be spelled out. In most cases the trust is obliged to buy back units, but you may find that in some cases this is at the discretion of the managers. This may apply in the case of some of the property trusts and is an understandable protection in the case of a “run” on • the fund when there would be problems in liquidating sometimes difficult to sell property. In the case of foreign unit trusts, you may want to find out what the expected charges are for the investment advice in respect of the foreign investments that are made. Are these charges payable out of the stipulated management fee or is it an additional charge levied on the fund. Such advice can come very expensive and eat up any of the immediate income from the trust. Many readers, particularly those not experienced in investment matters, may well despair of being able to evaluate all these and carry out all the suggested checks before choosing the unit trust best suited to their needs. So, why not simply seek advice? A sharebroker is a very good person to get advice from. They are in the business of offering investment advice and they do not charge for that advice. If you decide to make an investment, they

get a commission on the business done. They understand the jargon in a prospectus and can certainly help you decide what would suit you best

If you do not know a sharebroker you will surely know an accountant a lawyer or a banker. Any of these will put you in touch with a sharebroker.

As previously stated, a unit trust is a good investment medium, particularly for those people unable or unwilling to invest directly into the sharemarket or into property.

The sharemarket is not at a peak now (it was last November) and history indicates that the sharemarket has never failed to overtake a previous market peak. So this must be as good a time as any to invest in the sharemarket or a sharemarket unit trust.

Although I am riot competent to judge the property market, I have no reason to think that similar conclusions would not also apply there. It is hoped these comments may be helpful to readers wishing to learn more about unit trusts. Even if they are not sufficient to enable you to make a final decision, at least they will alert you to some of the questions you should be asking whoever might be advising you on a possible purchase of an interest in a unit trust. J. B. Hindin, MA., 8.C0m., FCA, CMA is chairman of the Investors Unit Trust, a former chairman of the Christchurch Stock Exchange and is founder of the New Zealand Charitable Foundation, which collects capital funds from well-to-do people. The income from the invested funds is given in perpetuity to the charities of their choice.