Dec 03

The Advantages of trading Unit Trusts & OEICs

Many active investors ignore Unit Trust Funds and Open Ended Investment Companies (OEICs) because they think that they are expensive. They are concerned that the fund managers are more focused on securing their six digit bonuses, and keeping the fridges of their flashy City office well stocked with Champagne, than providing a good service for their customers. At Saltydog Investor we disagree, and believe that if you employ the right strategy there are some real advantages to actively trading Unit Trusts and OEICs.

Costs have come down significantly. There was a time when it was standard practice to charge 5% just to invest in a fund, and then an additional annual management fee of around 1.5%. Funds were often sold by Independent Financial Advisers (IFAs) and some of the fund charges were used to pay their commission – although exactly who got what wasn’t always obvious.

Over the last couple of years there have been some significant changes with the introduction of the Retail Distribution Review (RDR). The large fund houses are no longer allowed to pay commission to advisers and so the annual charges have dropped to around 0.75% pa. If you do not want to pay for financial advice and choose to trade through a fund supermarket, you should be able to choose from thousands of funds and not have to pay any initial charges.

The costs of trading depend on which platform you choose. Some allow you to buy and sell funds free of charge, but you pay them for holding your investments (the cheapest I’ve seen recently is 0.25% of your portfolio value per year), others charge a flat fee just like buying and selling shares.

There’s no stamp duty to pay, and most OEICs do not have a bid/offer spread. Contrary to popular belief OEICs are probably cheaper to trade than stocks and shares, and they have many other advantages.

  • You avoid having all your eggs in one basket. The first U.K. collective investment scheme was launched in 1868 and is still going today. The stated aim was to ‘provide the investor of moderate means the same advantages as the wealthy capitalist by diminishing the risk’. In other words by spreading the investment risk over a number of different stocks. Funds have the advantage of being able to buy stocks and shares in bulk, and you diversify your holdings to avoid losses caused by the failure of individual companies. The stock market is risky and you could lose everything if your share fails (remember Lehmann Brothers and the Icelandic Banks). Investing in funds is inherently less risky because the fund spreads its risk by investing in a selection of different businesses. If one company fails it will only have a limited effect on the total value of the fund.
  • They are highly regulated. The legal structures of Unit Trusts and OEICs are different, but the key thing is that in both cases the underlying assets that the funds invest in are separated from the business operating the fund and that as an investor you own a proportion of those assets. The investor’s money is effectively ring-fenced against losses elsewhere. This means that if the investment company has financial problems your investments will still be safe. They are also covered by the Financial Services Compensation Scheme.
  • Funds are clearly defined by their IMA sectors. The Investment Management Association (IMA) has defined over 30 different sectors and most funds in the UK fall into one of these sectors. Sector definitions are mainly based on assets, such as equities and fixed income, and some also have a geographic focus. To qualify a fund must stick to some pretty rigid rules. As the funds have to work within such tight constraints it’s hardly surprising that when a sector is doing well most funds in that sector will benefit. It is equally true that when a sector is suffering even the best fund manager will struggle. This may prove a problem for the professional investor who has a mandate to be fully invested at all times, but this is not the case for the private investor. By monitoring the relative performance of the sectors you can usually switch to one that is performing well, and there’s nothing wrong with holding cash when everything is struggling.
  • You get access to some top performing fund managers. It’s often quoted that over the long term most funds fail to beat their benchmark. It is equally true that at any time some fund managers will be significantly outperforming their benchmark – it’s just a case of knowing who they are, and when they are doing it.

For all investors there is one thing that you can rely on if you take an active approach to investment.  Unless you have the luck of a lottery winner you will very rarely invest at the very bottom of the market and get out right at the top. But that’s not a reason to put up with mediocre returns from taking a passive approach to your pensions and investments

Most people assume that taking an active approach requires the investment expertise of Warren Buffet, the cunning of Nick Leeson and a tall sky scraper in Canary Wharf full of analysts leafing through an even taller pile of investment data to spot the winners and losers.

At Saltydog Investor we have brought all this valuable market data together and produced it specifically for DIY investors in a format that is easy to understand, easy to act on and, most importantly of all, sufficiently up to date to give you the edge.

We launched our ‘Tugboat’ portfolio in November 2010 as a way of showing our members how our weekly analysis could be used to manage a low-risk ‘cautious’ portfolio. By holding the majority of our investment in the least volatile ‘Slow Ahead’ funds, and by being willing to head for the ‘Safe Haven’ when markets turn South, we have avoided all the significant market falls, and at the same time taken advantage when conditions have been favourable – as a result we have consistently outperformed the FTSE100, the balanced managed sector, and achieved an overall return of nearly 43%.


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To find out more about the service we provide, and the 2 month free trial that we offer to all new members, go to our website


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