The best-kept secret is out: The unit trust industry is entering an exciting period of change and development. Alison Eadie looks at the shape of things to come

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The Independent Online
SALES of unit trusts to private investors are holding up reasonably well, despite the slump in stockmarket volumes worldwide.

Share trading volumes have been falling steadily in London from their January peak, yet total net sales of unit trusts were pounds 1.1bn in June against pounds 612m the previous June. Total net sales in July and August, however, dropped by 32 per cent and 21 per cent on the same months the previous year, but the fall-out was more among institutions than small investors.

Philip Warland, director general of the Association of Unit Trusts and Investment Funds, said unit trusts had been 'discovered' in recent months and were no longer the best- kept secret in the marketplace.

The popularity of personal equity plans has provided a boost to the unit trust industry. The growing cost to the Treasury of the generous tax relief has raised fears that Peps could be a victim of their own success. Autif's Budget submission this autumn recommends no change to the pounds 6,000 a year per person unit trust Pep allowance.

It argues that as the average unit trust Pep take-up is pounds 4,500 a year and average earnings are around pounds 17,000, the pounds 6,000 limit is sufficient to allow a continuing widening of personal equity ownership.

The association does, however, ask for other changes. It wants the Tessa regime allowing interest to be earned tax-free by UK investors in designated bank and building society accounts to be extended to unit trust money-market funds. Such funds cannot be 'Pepped', because of the rule stipulating Peps must be 50 per cent invested in shares, but suffer a disadvantage against bank and building society deposits, argues Autif.

It also repeats its demand from the previous year that gilts and UK corporate bonds be included in Peps. It suggests a pounds 3,000 a year ceiling, pointing out that gilt Peps would provide the government with a further source of funding and corporate bond Peps would help finance 'the resurgence of British industry after the recession'.

Autif also pleads for a level playing field between offshore and onshore interest-bearing funds selling to UK residents and between UK unit trusts and continental mutual funds, which allow continental investors to receive income free of tax by rolling it up as capital gain.

When open-ended investment companies (OEICs) make their debut in late 1995, they should be allowed to issue a class of share which would be marketed only to non-UK residents and which allow for gross roll-up of income. According to Autif, such a measure would make the UK truly competitive with Luxembourg and Dublin, the main offshore competition.

Autif has vigorously promoted unit trusts to investors who may previously not have ventured beyond the confines of building society deposit accounts and privatisation stocks. It produces factsheets on unit trust monthly savings plans, Peps, Pep mortgages, school fees planning and the latest on emerging markets.

Volatile emerging markets come with a more pronounced health warning about the value of investments going down as well as up. Autif suggests the following precautions: build up a portfolio in developed markets first; limit exposure to 5 per cent to 10 per cent of the total portfolio; treat emerging markets as longer term investments than other unit trusts (more than five years).

The unit trust industry is going through a period of upheaval. The advent of OEICs, with corporate structure, could spell the gradual phasing out of unit trusts, with their trust structure.

Such a change will make selling to continental investors considerably easier for UK fund managers. While UK investors may notice little or no difference, managers will.

Guinness Flight is looking forward to switching its unit trusts over to OEICs. Jack Springman, marketing director, said Guinness Flight was already comfortable with OEICs, through its Jersey-based umbrella funds, and was keen to harmonise its products with the same year end producing economies of scale in auditors' fees.

Much depends on the final shape of the OEICs legislation. David Kneeshaw, head of personal finance and marketing at Swiss Life, believes those keen to sell on a pan-European basis will launch OEICs and abandon new unit trust launches. Swiss Life, with its extensive continental client base, closed down its UK unit trust operation two months ago and uses Dublin as its base. The big question is whether OEICs based offshore will be Pepable.

Other issues on the industry agenda include single pricing and disclosure of charges. Autif is at present battling with the newly created Personal Investment Authority, which it believes is in danger of making a unit trust look like a life product.

Julian Tregoning, chairman of Autif, says the disclosure of charges on unit trusts is already more explicit than on any other financial services product. But he adds, 'It would be madness for us to throw away the excellent reputation we have achieved in the public's mind by appearing to be reluctant over the last few changes that will be needed to bring comparability with other products.'

(Photograph omitted)

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