About Unit Trust

Unit trust is a word used by many FPs without much understanding. The purpose of the following blog posting is to help FPs to unit trust as describe in the fund prospectus. I will use Schroder Greater China Fund prospectus as an illustration.

Unit trust is legal arrangement. Each trust is a legal document which spells out the mandate of the fund. For example, if the mandate says “China fund”, the fund manager can only use the money collected to invest into China or HK stock-market. It can’t invest in India stock market. Unit trust consists of 3 main parties. They are the fund managers; trustees and the unit holders (i.e. investors like you and me). Their respective roles are as follows:

The fund manager

In this case, the fund is Schroder Investment Management (S’pore) Ltd. FPs should take note that the fund manager is a business entity and not an individual. Within Schroder, they are many “portfolio managers” (i.e. individual manager) to make investment decisions. The role of these portfolio managers (usually CFAs) is to decide which company’s share or bond to be invested. The parameter is spelled out in the trust deed.

FPs should note that the internal process of screening the stocks in the fund manager company is very intense. And we should respect that process even though there is no guarantee of the fixed return. Anyway, there is no guarantee return in the world of investment.

The trustee

In this case, the trustee is HSBC Institutional Trust Service (S’pore) Ltd. The role of the trustee is to over –see the fund and sometimes serves as the custodian of the fund. The fund manager is legally accountable to the trustee. Therefore, the fund manager cannot run away with the money.

If the trustee goes into liquidation, the fund is intact because the find is ring-fence by the trust deed. In normal situation, the next trustee will be appointed to take over.

The unit holders

The unit holder is you and me. Unit trust provides a way for you and me to invest in areas which could be prohibitive as an individual. For example; emerging market equities; US$ high yield bonds. As these products requires either foreign currency or large amount money.

Q25: "Performance Envy" part 2.

This last question helps reframe the prior response by reminding the client that the go-go portfolio A might well have taken a significant tumble instead of a rocket rise.

Q24:"Performance Envy" part 1

This is a follow up question with Q23, and addresses the problem of “performance envy”. If the client indicates he will switch the portfolio, FP is to educate client on the difference between trading and portfolio planning.

Q23: Possible ranges of portfolio value.

This question is designed to prepare client on the possible outcome of portfolio value. It is aim to detect the difference between client’s profess risk tolerance and actual risk tolerance as depicted in the question.

Q22: Contingent liabilities

This question is designed to further educate client on the impact of liabilities can cut-short the time horizon of the portfolio pre-maturely. The wording is similar to Q20.

Guarantor: If client is a business owner, this situation is common. FP needs to be sensitive to this.

Creditor Situation: Depending on the degree of the situation, an investment into an irrevocable trust fund would be more appropriate.

Margin Call: This situation arises when client pledge his shares to a bank for a credit facility, usually for further investment. If the value of the pledged shares fall to an undesirable value, the bank would demand client to top-up the difference, otherwise the shares would be force sell, and bank would claim the difference from client. This situation usually happens to HNWI.

This question (& Q20) will assist FP to link investment planning to other parts of financial planning.

Q21: Now you a test to take....

This question is designed to explain to client the difference between risk averse and loss averse.

It is very rare that the client does not choose (a) in question #1. We then uncover question #2 and ask client to make a choice between (a) and (b). It is very rare that the client does not choose (b). We use this opportunity to explain the difference between risk averse and loss averse. We tell the client that we understand their concern with risk. In question #1, client does not wish to take a risk in order to earn more money. However, in question#2, client would take a risk to avoid losing money. For example, in real life, inflation risk can eat into client’s wealth, which could mean loss of wealth to sustain client’s standard of living in the long term.

Q20: Life transition events

This question is designed to address life transition issues, which would cut-short the time horizon of client’s portfolio pre-maturely. FP should be sensitive not only on the client’s transition event but also of his dependents’ life transition event, for example parent’s death. Special event includes divorce, creditor situation etc. Client is encouraged to describe about the potential issues. This question provides the link between investment planning to other parts of financial planning.