The very first unit trust was launched by M&G in 1931. At approaching 90 years old, they have a history to be proud of. As a portfolio manager that builds models using collective investments, unit trusts are pretty central to our business and there is hardly a day goes by when we do not interview a unit trust manager. Discounting income and accumulation shares, and different classes due to charging structures, there are over 3,000 / Open Ended Investment Companies on offer which collectively have in excess of £1.3 trillion of assets under management. Unit trusts are still being launched, so they are still obviously considered a suitable home for capital and relevant for investors and fund managers alike – after all, in the world we live in today, if they weren’t considered appropriate, why would they pass scrutiny from a product committee, compliance department, marketing and sales teams?
But (and we all knew there was going to be a “but”) I believe there is plenty of things wrong with them. Some issues relate to their structure; some to administration; some to their use and others to their history. As this is entitled Part I, it would make sense to expect more of these observations to come over the ensuing weeks and months as my bugbears come to mind. I would wholeheartedly welcome feedback and correction where I am wrong and think that conversations like this are needed to help drive the profession forward. I would also like to know if others are experiencing the same frustrations as I and to be able to offer alternative solutions. Our profession covers many facets and some of the issues I have might just not be able to be resolved – whether that be legally or operationally for instance. Maybe some of the frustrations I am feeling are just ones I alone feel. The Investment Management industry is large and has a wealth of knowledge within it – collectively we should be making investing easier; quicker; more user friendly and in parts this is happening, but are we doing it quick enough? I would love to hear from you about your frustrations and annoyances too….
My first observation is in relation to our unitised fund of funds business and the administration surrounding it. We are not our own ACD (Authorised Corporate Director) as this function is outsourced, so we are aware that if we would like to invest in a product then this has to be first approved by them. To put in some form of context, if we would like to invest in a unitised fund then we have to ask the ACD to approve the fund. With an SLA in place, they have to look through the prospectus, check for suitability and let us know within a certain amount of time if they would approve it. We have to do this on a line by line basis. So, for instance, we would have to request Income Units and Accumulation Units and the charging class along with the appropriate SEDOL and ISIN codes.
Our ACD places the trades from our instructions. We place trades daily in open and closed-ended funds, onshore and offshore listed as well as Exchange Traded Funds.
We are aware that with an external ACD there are additional processes to go through, but this three-way approach – us, the ACD and the Investment Management Company - we would like to use aids in assisting a “smooth as possible” transition. Once we have requested a fund to be approved the back-office functions should get to work and put the process in motion. I understand there is a need for authorised signatories, application forms, anti-money laundering work, agency codes and the like to be set up. But, we are not the first company to be doing this. Why does this process take (typically) more than two weeks to process? Why is the process manual? Why do some groups need to have faxed proof? (How many people reading this under the age of 30 know what a fax is?)
The reason why this is my first gripe is that if I wanted to buy an ETF or an Investment Trust, I don’t have to…
- Request approval from the ACD
- Get involvement from the fund management company
- Worry about anti-money laundering, agency set up codes etc
- Transact on the day I want to make the decision
- Transact multiple times on the same day
It amazes me that the money comes from the same place (the fund of funds unit trust that we manage) and yet the rules are different. Most people consider ETFs as a passive investment. I think the next wave of ETF launches (ETF 2.0) they will be actively managed and then the unit trust world will be under massive pressure (something for another piece). Unit trusts are priced once a day (something for another piece) whereas ETFs are live priced. Not all unit trusts are priced at the same time (something for another piece) which can cause issues relating to investment returns and tracking errors and volatility. Unit trusts have different pricing structures too (bid/offer spreads, swinging single pricing, dilution levies etc) and unless you know what you are doing you could be causing your clients a disservice (something for another piece too).
In a world where digital is the way forward, this feels less than analogue. I recently opened a new online bank account. It took 15 minutes – a couple of questions and photos of a couple of forms of identification and all was up and running. Unless the back offices of unit trust companies pluck their ideas up, they will be facing headwinds. Sure, unit trusts are 90 years old; they have stood the test of time, but is their time up because of administration failures?
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