Unit trusts will do until he gains experience or the golf swing improves
This is the second in an occasional series of conversations in which an old hand provides basic answers to frequently asked questions about fund investing.
AULD Mac is quietly enjoying his evening scotch whisky at the golf club when he is surprised to see young Helen striding across the bar, looking worried.
'Hallo there, Helen. How're you? Where's Bill?' Mac asks.
'He's out on the practice green with a new putter. That's why I want to talk to you now. I'm worried about him,' Helen says.
'Worried? You've only been married a few months. What's the problem?' 'It's this investment thing. He's becoming obsessed with it, and I'm worried we're going to lose all our money.' 'Why? Is he dabbling in derivatives or something?' 'No. It's these unit trusts you told him about last week. My father says they're dangerous things.' 'Now, Helen, I've known your dad for more years than I care to remember. Good Hakka stock, he is. And there's nothing he doesn't know about Chinese medicine, but he doesn't know much about investment. He keeps all his money in gold under the bed.' 'But Bill doesn't either. He knows everything there is to know about computers, but investments . . .' 'Which is why I told him to stick to unit trusts until he knows more. What's really worrying you? Do you know what a unit trust is?' 'Yes, Bill told me last week, and I've been reading up. But what happens if one goes bust? Do we lose all our savings?' 'For a start, you shouldn't put all your savings in any one instrument, however safe. Second, no you won't.
'Let me explain. Unit trusts are not like, say, licensed deposit takers. Or even banks, which can crash. Trusts are run by management groups whose job it is to administer the fund, invest the money, report to the unit-holders and execute buy and sell orders on behalf of the unit holders.
'They don't hold your money in a vault. If there's a rush of sell orders - they call them redemptions - they sell the underlying shares to pay back the unit holders. Of course, there's no guarantee that you'll get back what you put in, but that's markets.' 'So who looks after my money?' 'Ah, welcome to the world of the trustees . . . boring but invaluable. Y'see, your assets are held in trust, and it's the trustees' job to see that no one plays fast and loose with them. Their job is to make sure the fund is run according to its investment guidelines.' 'But are the trustees safe?' 'You always did have a suspicious mind, Helen, and quite right, too. But even I would be surprised if a trustee was in cahoots with con men. Not that there have not been cases when trustees have been found wanting. Remember Bob Maxwell in the UK and the way he plundered the Mirror Group pension fund? But that wasn't a unit trust.' 'But if the management just goes bust?' 'Then the assets, held by the trustees, will be distributed back to the unit holders. Or the fund will be taken over by another management group.' 'Wouldn't it still be a good idea to spread our investments over several managers, though?' 'If the funds invest in the same sort of asset class, then why pay the extra fees? What you should be worrying about more is what happens when managers decide to merge their funds - and that's going to happen a lot around here in the next few months. Some of these funds are too small now to warrant separate management. The fixed expenses make them uneconomical.' 'What happens then?' 'You'll either get your money back, at the current net asset value price, or you'll be offered an alternative fund in the same manager's portfolio.' 'What if I like the fund I'm in?' 'Well, you can vote against the scheme - it has to be put to the unit holders - but if 75 per cent vote in favour of closure, then you have to go along. But look, Helen, you are only starting to invest, so if you pick a fund which is valued at well above, say, US$10 million, it shouldn't be an issue. The golden rule is to read all the small print before you buy and keep a close eye on all the reports that the managers issue.' 'So you think Bill is doing the right thing, then?' 'By investing in unit trusts? Yes, provided he's sensible and not greedy. If you are talking about his putting . . . he's moving his wrists too much.' Ray Heath is pleased to receive general queries about investing in funds, but he cannot offer investment advice or recommendations.