The Gazette 1989

A pril 1989

GAZETTE

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-

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.

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