Unit and Investment Trusts

Your questions about unit trusts and investment trusts answered by Graham Hooper of Chase de Vere.

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What exactly are unit and investment trusts?

It's all about risk really. Instead of betting on an individual share, you put all your money into a fund along with everyone else.

The theory is - let's say you've got 100 investments in there - that if one goes down you're not going to take the hit on it. With unit trusts, they tend always to trade around the value of their investments .

With investment trusts that's not necessarily the case. It's also dependent on demand and supply for that specific trust, so there's more influences acting on investment trusts than there are on unit trusts.

Greg from Gloucestershire is thinking of taking out an investment trust - he wants to know what NAV means.

NAV stands for net asset value. That is the sum of all the underlying investments.

So of those 100 shares you might have in your trust, you add up their value and whatever that comes to, that's the net asset value. It's exactly the same for investment trusts. But they might not always be near their NAV.

If there are more sellers than buyers with an investment trust, you get what they call a discount. If there are more buyers than sellers, then the trust goes up.

What dictates the price of unit trusts, asks Ernest in Cheshire?

It's just the underlying assets, it's really as simple as that. If you had a trust investing in the whole of the stock market, then whatever the stock market does today it would fall or rise by the same percentage.

If thousand of investors all bought millions of pounds of shares, the prices would naturally rise, says Paul Tomlinson from Mold. Is this mirrored in the annual rush to buy Isas - do you get fewer units by buying in the peak period?

Theoretically, if nothing else happened in the market at that time, Paul would be right.

If the market stayed exactly where it was and the only influence was money coming in through Isas in the last month before the end of the tax year, it might move prices. In reality though, there are pension fund managers and insurance funds buying and selling.

There is billions of pounds going into Isas but it is still a tiny amount compared to the amount that pension funds and insurance funds deal with.

What are zeros, asks Jon Sayer? I've heard they're good ways of investing but a bit complicated.

Zeros are actually quite simple but the name's quite complicated.

They're a type of share in a split capital investment trust and they don't declare dividends, so they're great if you want to have a fixed return over a number of years but accrued to your Capital Gains Tax exemption, which very few people actually use.

They're under-utilised because they're relatively safe, but you can get roughly up to 8% tax-free.

Graham Britton of Warrington has a baby daughter and wants to invest £20-30 a month for her in a trust. He's baffled by the range on offer.

For an investment, until she reaches 18, stocks and shares are the best place to be.

If you want a bit of risk for £20-30 a month, then unit trusts or investment trusts are ideal. One thing I would look at would be a UK growth unit trust, where you're stuck to the UK market - middle-of-the-road, not a lot of risk involved but you expect a better return than cash over the longer term.

Or you could try an international investment trust, Foreign & Colonial or perhaps Witan, something like that - low minimums, low charges and again a good long-term track record that you can rely on.

Are cheap tracking funds a better option than more expensive actively managed funds?

That depends where the market is. Over the past year a tracker would not have done so well and your best bet would have been an actively managed fund.

With the sort of market we're seeing at the moment the best bet would be to go for an active fund manager, even though they are a bit more expensive. You've got more chance of making money with them than you have with a pure tracker at the moment.

But it's important to choose the right fund manager - that's the key thing.

Tech stocks have taken a battering in the past 12 months. Is it time to sell up or to stick with them?

If you put all your money into tech stocks last year and that's the only money you've got in the stock market, then I suppose you should be thinking of putting money into other sectors of the market.

If it's only part of your portfolio, then the time not to sell is when the market is down. There is an argument for buying more, as long as you're patient - look at three or five years. You should never go into the stock market, particularly an area like technology, on a one-year basis.

When share prices like those in the technology sector fall so dramatically, why don't fund managers convert to cash to limit their losses, asks Mr White in Yorkshire?

They can't because they're not allowed to. Let's say we're running a tech fund and we think: "The market is looking a bit sticky, let's go over to cash." The regulators and trustees of unit trusts and investment trusts will get very hot under the collar because you can't leave the money in cash.

It's very important for people to understand that when you choose to go into a tech fund, that fund will be investing in technology - not cash, not the UK market, it will be specifically technology shares because that's what they have to do.

If you want cash, allow a proportion and put it in a bank or building society.

Why do only discount brokers offer you a refund on upfront unit trust charges? Can't fund managers give the same discount if you go to them direct?

There's nothing to stop them doing it but you have to look at the dynamics of the industry.

IFAs like ourselves give a lot of the fund companies more than 50% of their business so they don't want to upset us. They can't have one price for people going direct and one price to us, so that's why it happens.

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The opinions expressed are Graham's, not those of the programme. These answers are not intended to be definitive and should be used for guidance only. Always seek professional advice for your own particular situation.

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