Why would anyone buy a unit trust?

skillboy

Hi

I am researching funds and had a couple in mind.

Fund 1 is the Jupiter European (which is a unit trust and has a sell price of 1257.72 pence and a buy price of 1325.07 pence.

Fund 2 is the Threadneedle European Select (which is an OEIC and has the same buy and price of 201.39 pence).

My question is, why would anybody buy a unit trust when in this case they would have to buy at 1325.07 pence and if they wanted to sell they would have to sell at 1257.72 pence, an instant loss of 5.35%?

Surely it makes sense to only buy funds which have the same buy and selling price?

Am I missing something?

le_loup

You sure are.
Investigate discount houses. Perhaps Hargreaves Lansdown to begin with.

Linton

Investing in funds is for the long term. 5% at the start, even if you do pay it, isnt a great problem if you are looking for 105% return over say 10 years. Also, the bid/offer split is just one way a fund can pay for its running costs. The smaller the gap, the more the fund managers have to get from on-going charges. It doesnt make much difference overall.

dunstonh

My question is, why would anybody buy a unit trust when in this case they would have to buy at 1325.07 pence and if they wanted to sell they would have to sell at 1257.72 pence, an instant loss of 5.35%?

They wouldnt nowadays. Initial charges on funds is largely old hat. Even where there is a bid/offer spread quoted it does not mean that the full spread (if any) is being applied.

If you are looking at the likes of HL for your data then you need to remember that they are quoting full retail charges on the retail version of the fund. Not the clean version or the amount you will actually pay.

skillboy

Thanks all for your help!

Glen_Clark

skillboy wrote: »

Hi

why would anybody buy a unit trust

Good question. Having never bought into one I am not sure, but I can only guess its because they were recommended by commission hungry salesmen.
If you want a managed fund you can buy Investment Trust shares at a discount, charges tend to be lower, and the managers are not forced to buy and sell shares at bad times to meet redemption's.
Wheras if you want an open ended tracker fund you can buy ETFs with no stamp duty and total annual fees as low as 0.09% ( VUSA )

jimjames

Glen_Clark wrote: »

Good question. Having never bought into one I am not sure, but I can only guess its because they were recommended by commission hungry salesmen.
If you want a managed fund you can buy Investment Trust shares at a discount, charges tend to be lower, and the managers are not forced to buy and sell shares at bad times to meet redemption's.

I've never bought a unit trust on a salesman's recommendation, purely on my own research but as one of the easiest ways to diversify a portfolio I can see why anyone would want to buy.

Sadly investment trusts are not the cheaper vehicles that they used to be with fees now being explicitly separated out into the different components.

Many managed unit trusts could now end up lower than investment trusts but the other reason for holding ITs of closed end status would still apply.

Glen_Clark

One of the things that appeals to me about investment trusts is the discount - with 20% discount you get £100 of assets for £80. I realize you will probably only get £80 for your £100 assets when you sell them. But in the meantime you are getting the earnings on £100. Its like putting £80 in a deposit account and them giving you the interest on £100.

westy22

Glen_Clark wrote: »

One of the things that appeals to me about investment trusts is the discount - with 20% discount you get £100 of assets for £80. I realize you will probably only get £80 for your £100 assets when you sell them. But in the meantime you are getting the earnings on £100. Its like putting £80 in a deposit account and them giving you the interest on £100.

Unfortunately you will be hard pushed to find many ITs at 20% discount today - maybe a few Private Equity or some that have had a torrid 12 months. Discounts have narrowed so much in the last year or so that almost all the good ones are at a premium or at a very small discount.

dunstonh

Glen_Clark wrote: »

Good question. Having never bought into one I am not sure, but I can only guess its because they were recommended by commission hungry salesmen.
If you want a managed fund you can buy Investment Trust shares at a discount, charges tend to be lower, and the managers are not forced to buy and sell shares at bad times to meet redemption's.
Wheras if you want an open ended tracker fund you can buy ETFs with no stamp duty and total annual fees as low as 0.09% ( VUSA )

Most advisers were not authorised to advise on investment trusts pre-RDR. Since RDR and clean pricing, IFAs are required to consider them but FAs do not. Also since RDR, with clean pricing and unbundling, UT/OEICs are now frequently cheaper than their comparable IT.

Whilst ITs have some advantages of UT/OEICs, they can also have disadvantages. In general terms, many ITs are higher risk than their comparable UT/OEIC. So, the consumer needs to have an appropriate risk profile and capacity for loss as well as a higher level of understanding so they dont get caught out by premium/discount pricing and gearing. Recommending unpackaged ITs for a regular contribution plan (like the OP is considering IIRC) is expensive.

Glen_Clark

westy22 wrote: »

Unfortunately you will be hard pushed to find many ITs at 20% discount today - maybe a few Private Equity or some that have had a torrid 12 months. Discounts have narrowed so much in the last year or so that almost all the good ones are at a premium or at a very small discount.

CLDN is on 20% discount, despite rising 7% since I bought it 3 months ago.
Financial company accounts are so opaque few people understand them, I certainly don't, lets be honest about it. Even the CEO of RSA missed a £300m black hole in his own accounts.
But I have done well out of investment trusts using a formula so simple that even I can understand it - only buy those on a big discount.:)