CJR Associates unit trusts

What is a unit trust?

A unit trust is an open ended collective investment. It is open ended because the number of 'units' in each trust will vary according to supply and demand. It is collective because it puts together the money from many different investors for a professional investment manager to look after . It is the job of the unit trust fund manager to make sure the money is invested properly and to deliver the investors the very best returns.

What do they invest in?

Most unit trusts use the money given to them by unit holders to buy ordinary shares, or equities, but with more than 1,700 unit trusts managed by 170 management companies, there are a great many different types from which to choose. .

Some unit trusts are very general and hold a large number of shares in different companies, spreading investments into overseas companies in some cases.

Others are more specialised, giving the unit holders access to a particular geographic area, such as Japan, or a particular type of investment, such as Investment trusts. It is important to decide what level of risk you want to take before choosing a unit trust. In any event though, unit trusts are a way of spreading risk across a larger number of ordinary shares than might otherwise be possible.

Are unit trusts better than investment trusts?

They are certainly different! Both are collective investments, but investment trusts are closed ended. That is to say the number of shares in issue is fixed. As a consequence, the price can go up and down in relation to the value of the underlying assets, unlike a unit trust where the price is calculated in relation to the investment's value according to a formula laid down by the regulators.

Moreover, an investment trust can borrow money to invest on behalf of its shareholders. This can provide a boost to investment performance when markets are rising. But, equally, when they're falling, the falls will be exaggerated. Another difference is that investment trusts are permitted to invest in unquoted shares which again can add to the risk for investors, even if the potential rewards might be greater.

What happens if I want to cash in my unit trusts quickly?

As unit trusts are investments in the stock market, they should not be considered a short term investment. Typically you should be prepared to leave the money invested for at least three to five years, although you may find the markets move in the intervening period and allow you an opportunity to cash in at a useful profit. Remember most unit trusts will charge a front end fee so you need to hold the investments for a little while to recoup your expenses. Unit trust companies which charge an 'exit' fee will usually only do so for investors who want to cash in within five years. Most unit trusts require a minimum investment ranging from £500 to £1000, although there are savings schemes that allow smaller amounts to be put in each month. Unit trusts usually deal every day, but take care! There are a small number of unit trusts which deal only once a week or, very occasionally, once a month.

Some financial advisers have been advertising 'execution only' services enabling people to buy unit trusts for a small flat fee, avoiding the front end commission. Is this as good as it seems?

It depends whether you need advice or not. If you feel confident that you can choose the right unit trust for yourself, then saving costs will make sense. But if you want advice, allowing your financial adviser to earn some commission, will make sense. All the execution only brokers do, is earn the commission and then offer some or most of it back to you by way of a rebate - they won't advise on which unit trust to buy.

Are unit trusts expensive?

No-one works for nothing, so there are charges involved in buying a unit trust. Most management companies charge a 'one-off' fee as soon as they receive your money. This can range from as little as 1% or 2% to as much as 6%. But there are a growing number of companies who're moving to scrap their front end charges in favour of exit charges for investors who remain invested for just a few years. All unit trust managers charge an annual fee which can vary from as little as 0.75% to as much as 2%.

Often these fees will reflect the costs associated with investing in a particular area, so unit trusts investing overseas tend to be more expensive than those buying just UK shares. It can pay to shop around, some management companies will be more efficient than others at pegging costs.

How risky are they?

As risky as you want to make them, it depends how much risk you choose!

With so many trusts, you will not be surprised to learn that some are riskier than others. Invest in a unit trust buying small company shares in a little known foreign market, and you are making a risky investment. Invest in one with a wide spread of leading, blue chip companies, and the risk is much less. You need to understand the amount of risk you are taking by investing in different unit trusts. Most investment management companies will give you a guide to the risk profile of their trusts and stockbrokers and other independent financial advisers (IFAs) can give you valuable advice on which to choose.

Is a unit trust like a PEP?

Let's not get confused. A 'PEP' or personal equity plan is a 'tax haven ' device which enables you to take the benefits from share investment tax free. A unit trust can be bought and then held within a PEP so as to maximise the tax benefits from holding it. In other words, a PEP is just a tax efficient way of holding equity investments. Other investments such as corporate bonds can also be held within a PEP.

Any authorised unit trust that invests predominately in the UK or Europe is likely to be eligible for inclusion in a general PEP, but unit trusts cannot be bought for single company PEPs.

Other unit trusts investing outside the European Union may be eligible for inclusion in a PEP, but only with a relatively small proportion of the money available for investment.

How do I find the best performing unit trust?

If I knew that I probably wouldn't need to work again for the rest of my life! However, its always useful to look at the past performance of investment managers. Although unit trusts will tell you that past performance is not a guarantee of future returns, if a fund manager has done consistently well in the past, it is reasonable to assume he may do better that average in the future. Similarly, a poor performing trust in its sector is unlikely to suddenly turn into next years star, unless there is a particularly dramatic change , such as, a new fund manager. Unit trust performance statistics are available in our Rates & Performance section, seek out trade magazines like the monthly "Money Management" or talk to a stockbroker or independent financial adviser (IFA).

Where can I get further information on unit trusts?

The trade body, the Association of Unit Trusts and Investment Funds (AUTIF) can provide leaflets on unit trust investment for beginners. In addition, many unit trust companies themselves will have product literature, although, if you are not used to investing, you may find some of the terminology confusing. And of course, stockbrokers and independent financial advisers should be able to tell you more and explain the advantages and pitfalls of investing this way.