The Daily Telegraph - Saturday - Money
PERSONAL ACCOUNT
Unit trusts put you at risk of trading blind in choppy markets
With hundreds of thousands of investors now using popular broker services or “platforms” to manage their Isas, pensions and other investments, it has become quick and cheap to buy and sell funds.
In many cases it’s done with the click of a mouse, and for free. Beware. Behind the scenes, the way most fund transactions are completed can expose you to unexpected losses.
In very volatile periods, you can lose money if markets move substantially between your placing the order and it being executed.
This risk applies to unit trusts and their similar counterparts “Oeics” – standing for “open-ended investment companies”.
It does not apply to funds such as investment trusts or the new generation of ETFs (exchangetraded funds) where investors buy and sell, for a known price, shares listed on the stock market.
Unit trusts and Oeics are by far the most popular type of fund with investors, however, so the risks are well worth outlining.
Like all funds, unit trusts work by pooling savers’ cash and using it to buy company stock and other assets.
Every day, usually at noon, the fund’s assets are valued. And at the same time all the buy and sell instructions for that unit trust which have been received since the previous day’s valuation are processed.
The upshot is that investors in these funds don’t know the price at which they have bought or encashed their units.
Usually it doesn’t matter. But in markets like today’s it can make a difference.
I asked popular fund firm Invesco Perpetual to provide prices for a couple of its funds on successive days earlier this week.
On Monday, at the noon valuation point, units in Invesco Perpetual UK Growth fund were valued at £5.13 each.
On Tuesday the value had fallen to £5.03, almost 2pc lower.
Tuesday was a bad day for markets, but that is not really the point.
The point is that an investor unaware of how the system works might have placed a sell order early on Monday afternoon, only to discover in due course that the trade was executed at a lower price a day later.
Whether buying or selling, 2pc is considerable: and with the probability of even choppier markets ahead, much bigger losses could occur. British investors are especially vulnerable to dramatic movements in America.
A maelstrom unleashed in America overnight is likely to be echoed in London in the morning, ahead of the point at which your sell order – placed unwittingly the previous afternoon – is actually transacted.
The safest thing is never to buy or sell unit trusts or Oeics in the afternoon.
When investors learn that this is how most funds work, many are amazed that the process could be so crude and open to detriment.
And it does seem an incredible anachronism. Unit trusts began in the aftermath of the depression, with the first portfolio being advertised in 1931. That was the era in which share prices were communicated by telegraphic tickers. Much trading was as a result done by mail.
Today, bizarrely, while anyone can get a real-time share price on their phone or watch, unit trusts still seem to operate on the same, anachronistic timescale of the first class post.
The new stamp duty rules – apparently so simple when George Osborne announced them in his Autumn Statement – are rapidly turning out like so many of this Government’s other hastily conceived tax measures: a nightmare for all concerned.
Property buyers don’t understand the rules. Their solicitors and conveyancers don’t understand them. Based on readers’ experiences, it seems increasingly likely that Treasury officials don’t understand them either (see story opposite).
The tax tries to distinguish between the intentions of property buyers – those who want to buy a home to live in, and those who want to invest. In reality life is not so binary. The rules are now straining against so many exceptions.