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GAZETTE
A
pril
1989
Unit Linked
Funds
Unit linked funds have proved attractive for many investors in recent
years. Some have suffered losses, but the vast majority have
secured returns well above those available from any type of deposit
account. The range between the best and the worst performers has
been sizeable, however, and it is not always easy to predict the high
fliers in advance. If the return is to be maximisqd and losses
avoided, the investor, and/or his adviser, needs to be well informed,
not only as to what, and when to buy, but also on when best to sell.
The general good performance although in some cases it can give
should not blind anyone to the risks
involved either. There are now a
few "guaranteed" funds but, those
apart, unit values can move down
as well as up. That said, however,
there is now such a range of funds
to choose from that most investors
can find one to suit their own
particular degree of risk aversion.
It should not be forgotten that
there is a heavy initial cost to the
investor in Government tax and set-
up charges. So unit funds are best
viewed as a medium to long term
investment. But just what are they?
Unit linked funds are a kind of co-
operative investment venture, man-
aged by life insurance companies,
with a large group of investors
putting their money into a central
fund. They each get so many
shares in that fund - so many
units as t hey are called -
depending on the sum they invest.
And the fund of money is managed
for them by the insurance com-
pany. In Britain most such funds are
set up under unit trust legislation.
In Ireland it was easier to set them
up under life insurance legislation
so that there is always a small
element of life insurance involved.
The funds are usually open to both
lump sum investors and those who
take out savings type life insurance
policies with monthly or annual
premiums. Here we are considering
only lump sum investment. The life
insurance element is relatively
small. It is just an extra bonus
the investor a small tax relief as the
investment is considered a life
insurance premium. But tax relief is
only given on up to £1,000 in
premiums each year - £2,000 in
the case of a married couple.
The lump sum investor has a
wide range of unit linked funds to
choose between. There are equity
funds, property funds, gilt funds,
cash funds, and managed funds.
The last of those generally contain
elements of all the others. The
degree of risk varies with the type
of fund and, indeed, within the
investment policies of the various
fund managers.
In almost all cases, however,
there is some risk - something
which became very obvious with
the crash in share values in October
1987. That resulted in the intro-
duction of some funds - from Irish
Life and Hibernian Life - which
guaranteed that, at the very least,
the investor could be assured of
getting his money back at the end
of three or five years. During the
three or five years, the value of the
units can move up or down but
there is a guarantee of at least
getting the capital back at the end
of the period.
Those apart, however, the value
of the investment can move down
as well as up and there is always
the chance of loss. Indeed just
getting your money back at the end
of five years would represent a loss
too since you could have been
getting interest somewhere else.
But, of course, the hope is that the
funds will perform better than that.
And, indeed, over the longer term
- and despite the crash - most
funds have risen at least in line with
inflation - many have far exceeded
that.
Unit Linked Funds
Units have a " b i d " and an " o f f e r"
price and there is usually a gap of
eight per cent between the two.
The higher of the two - the offer
price - is the price at which the
insurance company is offering the
units to investors. The lower price
- the bid price - is the price at
which it will buy the units back. So
immediately an investor pays over
his money, he has lost eight per
cent of its value. If he cashed in his
units right away he would only get
back £92 for every £100 he
invested. That covers commission
and Government stamp duty. A
large investor may get some con-
cession which reduces this initial
cost. It can be by way of some
extra units given to him initially or
after a couple of years.
Some of the funds have reduced
the spread between bid and offer
prices but they all impose additional
annual management charges so
that the overall cost of the invest-
ment to the investor is not appreci-
ably changed. The relatively high
cost of making an investment
means that the investor should be
thinking of leaving his money for a
reasonably lengthy period, and he
should not switch investments too
often or too readily unless he can
do so at no cost. Most insurance
companies do allow investors to
switch from one fund to another
within their own stable at no cost
- usually at least once a year. But
switching from one company's
funds to another always entails a
significant cost - the full eight per
cent again. And that is something
to watch. Some financial advisers
have been known to encourage
such switching, more in the interest
of maximising their commission
than in the interest of the investor.
Normally, any income earned on
the fund is reinvested to the benefit
of the investors - although there
are provisions in some plans for the
investor to get a regular income.
This is arranged, however, by the
sale of units and there is no
guarantee that the remaining units
will continue to be worth as much
as the initial investment. In other
words, the income could, in some
cases, be paid out of capital.
Units can normally be cashed in
in full at any time, although there
is often a small expense deduction
made on the amount of any partial
withdrawal of funds. The perform-
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