Unit Trusts and OEICs (Open Ended Investment Companies) are collective investments which enable individuals to pool their money into a fund that is invested in a wide spread of shares or fixed interest securities. The range of companies and securities invested in will be more varied than the average investor can achieve alone. The fund is professionally managed to achieve maximum returns consistent with the stated investment objectives.
Unit Trusts are the traditional way of investing in collective funds, but OEICs (which have a longer history in Continental Europe) have been growing in popularity over the last few years. Most new investments funds are issued as OEICs, and many Unit Trusts have converted to OEIC status over the last few years.
Unit Trusts and OEICs offer investors the potential to achieve capital gains that exceed what is usually possible in a deposit account; however this involves taking an added degree of risk. Some of this risk may already have been minimised because when you put your money into a Unit Trust, you are effectively buying a small quantity of shares in several companies. The actual choice of underlying investments is decided by the fund manager.
Unit Trusts are relatively easy to buy, but unlike bank accounts (where interest is guaranteed) there are additional risks involved. The value of the underlying assets can rise and fall, and there is no guarantee that you will get back your original capital. Unit Trusts are broken down into ‘sectors’ for reasons of identification and comparison. There are funds which should cater for every risk profile, ranging from very low risk funds (i.e. cash or money market securities) to very speculative (emerging markets, warrants, fund of Hedge Funds, etc).
Unlike ISA’s, income from unit trusts are treated as taxable income, and any encashments are liable to Capital Gains Tax if they exceed your yearly allowance.
A Unit Trust is divided into a number of units, each of which represents a small percentage of the underlying investment portfolio, and the value of units can rise and fall in line with the underlying investment value. Unlike closed-end funds, Unit Trusts can issue new units whenever they receive fresh inflows of investor's money. In terms of charges, they typically levy an Annual Management Charge, along with a Bid / Offer Spread.
Most Unit Prices quote a buying price (Offer Price) and a selling price (Bid Price). The difference between the two values is known as the 'spread', which was usually about 5%, but can be lower of higher. Effectively, this is an additional charge imposed by fund managers, to cover costs such as administration, commission and dealing costs. Therefore, the effects of the spread needs to be overcome by investment growth before the units are truly growing in value.
Recently, insurance funds and OEICs have introduced the concept of a single-priced charging structure; there is a single price for the buying and selling of units, with the only charge being an Annual Management Charge (although many OEIC managers levy an initial entry or exit charge upon new investments).
Unit Trusts are mainly a UK phenomenon, due to the fact that Trust Law is not recognised in most non-UK jurisdictions.
Open Ended Investment Companies combine features of both Unit Trusts and Investment Trusts. Like Unit Trusts, they are open-ended investment vehicles, but they do not have the bid / offer pricing structure associated with unit trusts. Instead there is a single price for the buying and selling of shares. Like Investment Trusts
, they issue shares that are listed on the Stock Exchange, but when there is a demand for their shares, they can issue additional shares into the market. This means that the shares do not trade at a discount or premium.
Income from unit trusts, which is typically paid every six months as a dividend (but can be more frequent), is deemed to have been taxed at the basic rate before being received by the investor. While basic rate taxpayers have no further tax liability, higher rate taxpayers pay an additional tax charge. If you sell your units, a liability for Capital Gains Tax could arise if you have made a gain above the capital gains tax threshold.
Below is a list of the main sectors:
Funds principally targeting income - Immediate Income
Funds which invest at least 95% of their assets in sterling denominated (or hedged back to Sterling) Triple AAA rated, government backed securities, with at least 75% invested in UK government securities (Gilts).
Funds which invest at least 90% of their assets in UK Index Linked Government securities (Gilts)
Funds which invest at least 80% of their assets in Sterling-denominated (or hedged back to Sterling), Triple BBB minus or above bonds (as measured by Standard & Poors or an equivalent external rating agency (Moodys BAA or above)). This excludes convertibles.
Funds investing at least 80% of their assets in Sterling denominated (or hedged back to Sterling), and at least 20% of their assets in below BBB minus bonds (as measured by Standard and Poor's or an equivalent external rating agency), convertibles and income producing preference shares.
Funds which invest at least 80% of their assets in fixed interest stocks. All funds which contain more than 80% fixed interest investments are to be classified under this heading regardless of the fact that they may have more than 80% in a particular geographic sector, unless that geographic area is the UK, when the fund should be classified under the relevant UK heading.
Funds which invest at least 80% of their assets in the UK, between 20% and 80% in UK fixed interest securities and between 20% and 80% in UK equities. These funds aim to have a yield in excess of 120% of the FTSE All Share Index.
Funds which invest at least 80% in UK equities and which aim to achieve a yield on the distributable income in excess of 110% of the FTSE All Share yield.
Funds principally targeting capital - Capital Growth/Total Return
Funds investing at least 80% of their assets in Sterling denominated (or hedged back to Sterling), and at least 80% of their assets in zero dividend preference shares or equivalent instruments (i.e. not income producing). This excludes preference shares which produce an income.
Funds which invest at least 80% of their assets in UK equities which have a primary objective of achieving capital growth.
Funds which invest at least 80% of their assets in UK equities of companies which form the bottom 10% by market capitalisation.
Funds which invest at least 80% of their assets in Japanese equities.
Japanese Smaller Companies
Funds which invest at least 80% of their assets in Japanese equities of companies which form the bottom 30% by market capitalisation.
Asia Pacific including Japan
Funds which invest at least 80% of their assets in Asia Pacific equities including a Japanese content. The Japanese content must make up less than 80% of assets.
Asia Pacific excluding Japan
Funds which invest at least 80% of their assets in Asia Pacific equities and exclude Japanese securities.
Funds which invest at least 80% of their assets in North American equities.
North American Smaller Companies
Funds which invest a least 80% of their assets in North American equities of companies which form the bottom 20% by market capitalisation.
Funds which invest at least 80% of their assets in European equities. They may include UK equities, but these must not exceed 80% of the fund's assets.
Funds which invest at least 80% of their assets in European equities and exclude UK securities.
European Smaller Companies
Funds which invest at least 80% of their assets in European equities of companies which form the bottom 20% by market capitalisation in the European market. They may include UK equities, but these must not exceed 80% or the fund's assets. ('Europe' includes all countries in the MSCI/FTSE pan European indices.)
Funds investing in a range of assets with the maximum equity exposure restricted to 60% of the fund and with at least 30% invested in fixed interest and cash. There is no specific requirement to hold a minimum % of non UK equity within the equity limits. Assets must be at least 50% in Sterling/Euro and equities are deemed to include convertibles.
Funds would offer investment in a range of assets, with the maximum equity exposure restricted to 85% of the Fund. At least 10% must be held in non-UK equities. Assets must be at least 50% in Sterling/Euro and equities are deemed to include convertibles.
Funds would offer investment in a range of assets, with the Manager being able to invest up to 100% in equities at their discretion. At least 10% must be held in non-UK equities. There is no minimum Sterling/Euro balance and equities are deemed to include convertibles. At any one time the asset allocation of these funds may hold a high proportion of non-equity assets such that the asset allocation would by default place the fund in either the Balanced or Cautious sector. These funds would remain in this sector on these occasions since it is the Manager's stated intention to retain the right to invest up to 100% in equities.
Funds which invest at least 80% of their assets in equities (but not more than 80% in UK assets) and which have the prime objective of achieving growth of capital.
Funds which invest 80% or more of their assets directly or indirectly in emerging markets as defined by the World Bank, without geographical restriction. Indirect investment e.g. China shares listed in Hong Kong, should not exceed 50% of the portfolio.
Funds principally targeting capital protection
Funds which invest at least 95% of their assets in money market instruments (i.e. cash and near cash, such as bank deposits, certificates of deposit, very short term fixed interest securities or floating rate notes).
Funds, other than money market funds which principally aim to provide a return of a set amount of capital back to the investor (either explicitly guaranteed or via an investment strategy highly likely to achieve this objective) plus some market upside.
Funds that have an investment universe that is not accommodated by the mainstream sectors. Performance ranking of funds within the sector as a whole is inappropriate, given the diverse nature of its constituents.
Technology & Telecommunications
Funds which invest at least 80% of their assets in technology and telecommunications sectors as defined by major index providers.
Funds which are only available for use in a personal pension plan or FSAVC scheme.
Present arrangements for unit trust personal pension schemes require providers to set up separate personal pension unit trust under an overall tax sheltered umbrella. These funds then in turn invest in the group's equivalent mainstream trusts. Pension funds are not to be confused with 'Exempt' funds which are flagged separately.
Within the above sectors, there are literally thousands of funds that can be chosen. And within each sector there are different funds suitable for different risk profiles - some funds will be more adventurous (and more volatile) than others, whilst others will seek stable returns, eschewing more 'exciting' companies to invest in. Whatever your attitude to risk, there are funds available to invest in.
NOTE: This document is intended to provide a brief overview of the subject. It should not be read as a recommendation to use any particular product, as it does not take into account individual circumstances and attitudes.