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A matter of trust

Unit trusts are ubiquitous. Spring used to not only herald cherry blossom but also a carpeting of Isa adverts and the industry has persuaded two and-a-half million of us to invest some money in a unit trust.

Investment trust companies were the first collective investment vehicles to get off the ground but they were quickly overtaken by unit trusts, which have risen to an easy dominance.

The idea of a unit trust was introduced to the UK about 62 years after Foreign & Colonial&#39s first investment trust and only a year after the Wall Street Crash.

A London stockbroker called W B Burton-Baldry was taken with the idea of “fixed trusts” that he had seen in America. Assisted by connections at the Bank of England, he convinced George Faber at Municipal & General to launch, in 1931, what was to be the first unit trust in the UK – the Municipal & General First British fixed trust.

This was very different animal to the unit trust of today. The portfolio was made up of deliberately safe and mainstream stocks that could also not be changed – which is why the trusts were referred to as “fixed”.

Of the 25 stocks that made up the original set menu, the majority are still around today, including Boots, BAT, General Electric, Shell and Guinness. The formula was a successful one and was quickly adopted by others.

The name derives from the split between the trustees who hold the securities and the management company that makes the investment decisions. Unlike investment trusts, unitholders do not participate in the overall profits of the company but only in the performance of their “unit”.

In response to criticism of the original product, M&G launched a variation of the original formula allowing the menu of stocks to vary. First available in 1935, these flexible trusts set the template for our modern-day counterparts. Nevertheless, initially, the original fixed trusts proved to be more popular.

Some of the unit trusts of today can trace their ancestry back to the early days – the Threadneedle UK select growth fund was originally launched by Allied Investors in 1934.

By the outbreak of World War Two, around £80m was under the management of 15 unit trust companies.

With World War Two came the imposition of capital controls that stifled the industry until they were lifted in 1953. It was only with the economic boom of the 60s that health returned to the industry.

The industry&#39s trade body was set up in 1959 in the form of the Unit Trust Association, renamed the Association of Unit Trust and Investment Funds in 1993, becoming the IMA last year.

Heavy advertising propelled sales, which were predominantly direct, and the claims made in the intensive campaigns sometimes courted controversy. Lloyds Bank was the first high-street bank to foray in to this market, launching its unit trust in 1966.

Two years later, the Prudential was the first insurance company to offer unit trusts. By the end of 1972, there was £2,647m in unit trusts, up from just over £100m in 1958. A cap on charges was in place – in effect a 1 per cent world ahead of its time.

The oil crisis of the early 1970s proved one of the biggest challenges to the industry. After the stockmarket crash of 1972-4, funds under management had fallen by half. In the economic and political uncertainty – soaring oil prices, the miners&#39 strike bringing down the Conservative government, inflation at a heady 26 per cent and the FTSE All Share collapsing to a fraction of its value – meant unit trusts had collapsed in value by 1974.

In the dark days after the crash, the industry was kept alive by insurance companies, whose products carried tax relief unavailable on direct offerings. While sales dipped, the amount of unitholder accounts was, therefore, able to remain relatively even.

Together with the gradual rehabilitation of unit trusts came the emergence of professional investment advisers, the precursors of our present IFAs. With them, advice and commission became important drivers of sales.

A raft of changes was brought in under the radical Conservative administration of Margaret Thatcher which had a profound impact on unit trusts.

The cap on fees was abolished which allowed the selling of unit trusts to become more profitable, the withdrawal of life insurance tax relief restored competitive balance with the insurance companies and the removal of exchange controls freed up investment choices.

However, the most important innovation was the introduction of personal equity plans in Chancellor Nigel Lawson&#39s Budget of 1988. As part of Thatcher&#39s crusade for popular capitalism, these introduced tax-privileged access to a basket of equities at the same time as shares in the newly privatised utilities were being snapped up.

By 1992, unit trusts were allowed to take up the full Pep allowance, which proved a powerful catalyst to massive expansion of the industry. At the same time, trail commission was introduced as a novel form of remunerating IFAs that sold the products in the first place.

To reflect greater European integration, in 1995, new rules were announced which led to the creation of openended investment companies. With Oeics, single-pricing was introduced – before the price at which units were bought and sold differed, the so-called bid/offer spread.

Following its landslide victory, the New Labour administration wanted to put its own stamp on the successful Pep formula. So, in 1999, with minor alterations, Isas took over. Currently, the industry has about £207bn under management.

The highly regulated industry has its solitary scandal, courtesy of Morgan Grenfell. Fund manager Peter Young was alleged to have set up a complex web of Luxemburg holding companies as a curtain to conceal the siphoning of funds.

A media furore followed after his appearance in court in drag. He was found mentally unfit to stand trial but Deutsche Bank, which had bought Morgan Grenfell, was forced to inject some £400,000 into the funds so that 90,000 investors would not lose out as a result of the alleged embezzlement.

In a industry where musical chairs is the norm – 50 per cent of fund managers have been at their current post for two years or less – the few stalwarts stand out. After 32 years at the helm, St James&#39s Place&#39s Nils Taube is the country&#39s longest-serving unit trust manager.

The Fidelity special situations fund, under the stewardship of Anthony Bolton since its launch in 1979, occupies a unique position with its consistent good performance, conferring star status on its manager.


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