Unit Trust v Investment Trust ISAs

Jim02

Hi all,

Can someone explain to me the difference between an investment trust and a unit trust ISA?

Thanks

J

deemy2004

A unit trust buys and sells shares directly as investors put money in or take it out, and the unit price always (at least in theory) reflects the current value
of the assets.

An investment trust is a company like any other, with a fixed number of shares and a fixed pot of capital; when you buy shares you buy from another shareholder, the money doesn't get added to the investment pot, and vice versa. The result is that the share price is set by supply and demand, and in practice usually comes out less than the value of the assets (sometimes a lot less).

There are other differences; Investment Trusts are less restricted in how they can invest etc.

Also IFA's push Unit Trusts because they get a big fat commission out of them which they don't with Investment trusts. Personally I prefer Investment Trusts.

carnet

Investment Trusts are quoted companies which invest in other companies. Some have themes ie UK Income, Europe, Far East etc etc whilst others are generalists such as Foreign & Colonial, Alliance etc. They issue a finite number of shares which go up and down in value like all other quoted companies depending on (a) how well the IT is performing ie if its increasing its NAV and (b) general market conditions. You can buy and sell shares in investment trusts just as you would shares any other company. The main "problem" with IT's is that most of them trade at a discount to NAV (Net Asset Value). However this can also be exploited by an astute manager of an IT Unit Trust ie a Unit Trust which invests in Investment Trusts (the asset management world is very incestuous ).

On the other hand, Unit Trusts or, more commonly OEICS these days, are open ended investment vehicles run by investment management firms and managed by "professional" fund managers which issue units at near NAV to whoever wants to buy them. They impose an initial charge of typically 5% and an annual charge of 1.5% (the initial charge can be heavily discounted if you buy via a discount broker and one or two now even rebate some of their annual trail commission). The two main problems with UTs/OEICS is firstly, being open ended, a very successful one can become very large in size (Fidelity Special Situations, the last time I checked, was about £4.5 BILLION). The bigger the fund the less nimble it becomes and, regardless of the expertise of the manager, the less likely it is to top future performance charts (Anthony Bolton is the exception who proves the rule here ). Secondly, successful fund managers tend to move around more these days, so you have to constantly decide whether to stay with their previous fund(s) or move with them to their new funds.

HTH

odannyboy

Strongly considering investing a lump sum in the Aberdeen asian smaller com panies trust, any advice on them anyone? Done alot of saving recently, so now using money I want to expose to risk.

dunstonh

Also IFA's push Unit Trusts because they get a big fat commission out of them which they don't with Investment trusts. Personally I prefer Investment Trusts.

Hmm. Strange that the commission is the same with both.

The main reason that ITs get less coverage than OEICs is that most financial advisors are not authorised to recommend investment trusts directly as they fall outside their scope of permissions. However, where appropriate, advisors can recommend investment trust savings schemes.

deemy2004

Not according to many articles on the net

http://whatinvestment.money.msn.co.uk/msnwi216.htm

Typically Initial charged are on 5% to Unit Trusts and 0% on Investment Trusts

It’s the proud boast of investment trust managers that their charges are generally lower than those on unit trusts. Few impose initial charges – primarily because they don’t pay commission to financial advisers.

david78

I like to buy investment trusts at a wide discount which pay good dividends. This boosts the income you get compared with a similar unit trust/oiec. To keep maths simple say "value" (net asset value or NAV) of a share is £1.00 but discount is 20% so they buy and sell at 80p. Suppose yield is 5p per share. Put in £100 this buys 125 shares so income for year will be 5p X 125 = £6.25. For a unit trust with value of each unit £1 and same yield, you would buy 100 units and get income for the year of only £5.00.

If you are buying for income, the discount doesn't matter so much. You can still sell your 125 shares for 80p each and get your £100 back.

This is a much simplified calculation, but you should see the basic idea.

dunstonh

deemy2004 wrote:

Not according to many articles on the net

http://whatinvestment.money.msn.co.uk/msnwi216.htm

Typically Initial charged are on 5% to Unit Trusts and 0% on Investment Trusts

It’s the proud boast of investment trust managers that their charges are generally lower than those on unit trusts. Few impose initial charges – primarily because they don’t pay commission to financial advisers.

The average initial commission on Unit trust/oeics is 3% and is the same with ITs. It may be their boast but its not accurate.

dunstonh

You are mixing up charges with commission.

carnet

Is there not a little confusion going on here between charges and commission ?

Investing in IT's can work out cheaper than UTs/OIECS, especially if doing so via one of the many schemes run by the IT companies themselves ie no or negligible brokerage etc. Annual management charges on ITs are also somewhat less than on UTs/OIECS - no commission .

However, by using a good discount broker, especially one such as HL who also kick-back some of their trail commission, where you can buy the UT/OEIC at or just above creation price, there's not a great deal in it - especially as there are no selling charges associated with UTs/OIECS.

There's also a greater variety to choose from with UTs/OIECS and, IMHO, its easier to follow the managers.

deemy2004

Don't forget the wide bid offer spreads ! 5% ! as against typically about 0.5% on IT's So 10 times !

Also that you get the price once or twice per day, so if there are large market movements, will the UT Manager pick up the phone ? Whereas IT's like any stock are priced by the market, during normal trading hours.