Oran Hall | Unit Trust trustees, protectors of investors

The unit trust market is taking on a greater level of importance with each passing day, and, because it is vested with the responsibility of investing and managing the funds of so many people, a significant portion who know little about investments, it is critical that there are structures in place to protect the investors.

The management company and the board of trustees play very key roles in the operations of the unit trust, and confidence in this market depends heavily on them. The trust deed is also important to the overall operation of the unit trust.

As an investment trust, the unit trust is governed by a trust deed, which is a legal document that spells out how the manager and trustee should act in operating the unit trust, thus protecting the unit holders.

The board of trustees, a corporate body independent of the managers, acts as the custodian of the investments, cash and income of the unit trust, and holds ownership of the investments in trust for the unit holders.

The trustees have an obligation to take due care to protect the unit holders’ rights and interests and complement the work of the management company, which has primary responsibility for providing investment management and a wide range of management and administrative services to the unit trust.

The fact that the trustees operate separately from the management company and that the assets of the unit trust are registered in the name of the trustees and are under their care, ensures that the assets, which ultimately belong to the investors, are not commingled with the assets of the management company. This lends confidence to the investors or unit holders.

Duty as legal owners

The trustees have a role in ensuring that the unit trust management company allocates the assets of the respective funds according to investment restrictions and limitations stated in the trust deed and the prospectus of the funds. This also lends comfort to the investors.

As the legal owner of the assets in the unit trust, holding the assets for the benefit of the unit holders, the trustees have several duties, including the following:

• Taking custody and control of all securities, property and other assets of the unit trust scheme and holding them in trust for the unit holders by ensuring they are registered in the name of the trustees;

• Exercising reasonable diligence to ascertain if the management company has committed any breach of the trust deed;

• Doing all that is possible to ensure that the management company remedies any breach that they become aware of;

• Exercising all due diligence and vigilance in carrying out their functions and duties, in accordance with the trust deed and securities laws;

• Monitoring permitted investments to ensure that the management company manages and administers the funds in accordance with the trust deed and securities laws;

• Ensuring that proper records are kept of all transactions, dividends, interest and income received, and that proper records are kept of any income that is distributed to unit holders where this is the case;

• Requiring the management company to keep them fully informed of the details of its investment policies and any changes thereof;

• Ensuring that the accounts are audited at the end of each accrual period by the auditors, and ensuring that each unit holder receives a copy of the audited annual accounts within a prescribed period; and

• Collecting and recording the income of trust assets and ensuring that it is deposited to respective bank accounts.

Although it is the management company to which investors relate and which is charged with the responsibility of managing trust assets to give acceptable returns to investors, exercising due care while doing so, the trustees work behind the scenes and function as invisible hands to ensure that the funds of the investors are managed with integrity, responsibly and profitably.

No divorce required

The structures and systems in place to protect the interests of investors notwithstanding, investors in unit trusts need not divorce themselves from their investments in these collective investment schemes, for there are many things the trustees cannot do for them.

Investors need to know their objectives for investing. They need to determine what the objectives of the funds are and whether they match their own investment objectives.

They need to know the types of assets in which the various portfolios are invested and the risks associated with each, and to determine if they are comfortable with such risks, because creating a diversified portfolio does not mean the elimination of all risks.

The unit trust report, published in the Financial Gleaner on Fridays, gives an indication of the types of funds and, in some cases, the objectives of the funds, as well as the broad headings of the types of instruments in which the funds invest. This provides some scope for investors to do some basic research on the unit trusts and their funds before they make a decision.

Much as the trustees provide good protection for investors in unit trusts, the investors must ultimately protect themselves.

- Oran A. Hall, author of ‘Understanding Investments’ and principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel.finviser.jm@gmail.com