Page 51 - Profile's Unit Trusts & Collective Investments - September 2025

Basic concepts Chapter 2

charge or a smaller ongoing trailer fee. (Note this would be in addition to the platform administration
fees and underlying fund fees.)
Where funds do still impose initial fees they range from 0% to 3.45% (on specialist equity funds).
Even where these fees are imposed, unit trusts compare favourably to other “institutionalised” saving
options. Although 3.45% is up to three or four times the cost of buying shares through a stockbroker,
it is less than half the entry costs of products like endowment policies and life assurance, where total
entry costs are often as much as 7%.
Another advantage of unit trusts is that charges are fully disclosed. This level of transparency has
not existed historically in the life assurance industry, and it was common for a buyer of an endowment
policy not to know exactly how much of the amounts invested are actually being invested, and
how much is going towards costs. The publication of the effective annual costs (EAC) by most life
insurance companies has improved cost disclosure.
Convenience and liquidity
Collective investments are easy to buy and easy to sell. Investors have the choice of buying unit
trusts through an investment platform, through a financial adviser, through a bank, or directly from
the unit trust management company. Debit orders can be cancelled, increased or decreased without
penalty, unlike traditional assurance products. It is easy for investors to change their asset allocation
as their personal circumstances change – they can switch from equity-based investments to fixed
interest investments as required – and several services make it easy to manage a small portfolio
of unit trusts. Most importantly, managers or management companies are obliged to repurchase
participatory interests on demand, making collective investments highly liquid.
This flexibility and transactive ease has a dark side, however. It can lead to a lack of investment
discipline, and may allow investors to react emotionally to volatile market conditions: selling when
the market is falling, and buying when stocks are making new highs. Emotional reactions often
result in buying high, selling low – a sure way to lose money. This behaviour, in turn, can drive fund
managers into “forced trade” situations, where they have to buy into an expensive market because
of large inflows, only to sell into a weak market because of large outflows (ie, investors redeeming
units). So, while convenience must be seen as an advantage of unit trusts, it does demand of
investors that they become more knowledgeable and disciplined in their investment approach.
Pros and cons of collective investment schemes
The relative advantages and disadvantages of collective investment schemes is best illustrated
by comparing CISs to other methods of investing in securities.
As described above, the main advantages of CISs include transparency, freely available price and
performance data, a high level of regulation, professional management, and guaranteed buy-back
of participatory interests.
Direct investment
If you have enough capital, acquiring a share portfolio directly through a stockbroker is the most
obvious alternative to equity unit trusts. As a private investor, you need skill, time, and a cool head
to invest successfully in the stock market. Private investors have greater investment flexibility and
many may well outperform fund managers over time. Research suggests, however, that the majority
of retail investors with stockbroking accounts would be better off using unit trusts or exchange
traded funds (ETFs).
In 2013 two University of California finance professors published research showing how individual
investors earn poor returns from direct investments in the stock market (even before costs). Their
work has been confirmed in subsequent research that shows retail investors are poor stock pickers
who trade too often (driving up costs and impairing returns). The professors’ 2013 study states that
“many individual investors seem to have a desire to trade actively coupled with perverse security
selection ability”.
The advantages of direct investment include lower costs and more investment flexibility. The main
disadvantages are the high level of expertise required, the considerable amount of time required to

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