From suspicion to success

UNIT TRUSTS PETER WALKER, MP

It was a little over ten years ago when, walking to lunch in the City, I met a personal friend, the then new Member for Taunton, Edward du Cann. I knew that he was employed by a group of unit trusts and I inquired from him what progress the unit trust movement was making. I was surprised to learn that he was frustrated by the comparative stagnation of the unit trust movement as a whole.

triad at that time been busily engaged in building up an insurance broking business and had just returned from a business trip to New York where I had been impressed by the enor- mous activity and expansion of the American equavalent of the unit trust movement, the- mutual funds. With my limited knowledge of unit trusts in Britain I had presumed, quite wrongly, that a similar activity must have been taking place in Britain.

In fact, between 1939 and 1957 the unit trust movement had gone into a decline. It was the view of the City that, with the prewar Board of Trade restrictions on management charges still being applicable and with the post- war costs of administration and advertising, it was near-impossible for unit trust manage- ments to sell units and make a profit.

Of course there were fine old-established unit trusts managers such as the tvt AND c, who had been skilfully managing their funds, but there were none who were aggressively selling units to the public. The total amount invested in unit trusts had decline from a figure of some- thing like £100 million in 1939 to a figure of less than £90 million in 1956 in spite of the enormous increase in the value of securities resulting from inflation.

Edward du Cann believed that vigorous management would result in an expansion of the unit trust movement. My political beliefs made me feel that this was desirable; my buisi- ness experience in the United States made me feel that it was likely to succeed. We lunched together that day. At the end of the lunch he agreed that if I could organise the backing and finance required he would leave his exist- ing employers and manage a new unit trust if this could beformed.

With the backing of the London and Edin- burgh Insurance Company we launched in 1957 the first postwar British unit trust Our enemy was a complete ignorance by the public, and indeed by the professions, as to what a unit trust was. Unicorn, our first unit trust, got away to a modestly successful start. We utilised all of our resources to educate the bank managers, accountants, solicitors and the City auditors as to the purpose and organisation of a unit trust. Initially the establishment of the- City was correctly suspicious as to our likeli- hood of success. It argued that, with the Board of Trade allowing a total management charge, of 131 per cent of the sum invested for twenty years of management, with only 5 per cent allowed in the first year and the balance of 81 per cent to be divided annually over the following nineteen years, management could not possibly be profitable. We argued that such was the enormous increase in the potential saving power of the public since 1939 that the volume would itself enable management to be a feasible possibility. Fortunately the last decade has proved that our assessment was correct.

The total invested in unit trusts has risen from the figure of less than £90 million when we started to a figure in excess of £700 million today. The joint stock banks, then hesi- tant to become even the trustee to a unit trust, are now not only eager to become the trustee but are actually becoming the managers of unit trusts themselves. Life assurance com- panies look upon the unit trust formula as one that is appropriate for the provision of equity- linked life policies. Even during the last five years the number of unit trusts with which the public can invest has almost trebled.

It is my belief that the unit trust movement will now go through a period of rationalisation.

My own group of unit trusts has recently had its controlling interest sold to Martins Bank. Lloyds and Westminster Bank are both en- gaged in the management of unit trusts. I am convinced that there is little opportunity for successful unit trust management on a small scale. The competition is such that press ad- vertising now seldom brings in sufficient orders to provide the managers with management fees equivalent to the cost of the advertising itself.

The cost of directly contacting the public is immense unless there is already a vehicle in contact with the public such as a bank or an insurance company. The trend must therefore• be for unit trusts to be managed by concerns who already have to meet the overhead cost of meeting and providing services to the public.

To some extent this is a pity and personally I would be in favour of liberalising unit trust management charges. In the United States unit trust managers are able to charge far higher management fees, but on the perfectly reasonable condition that their charges are clearly stated to the would-be purchaser. There should surely be competition between unit trusts upon the standard of investment manage- ment. The best in investment management is expensive; the worst is free. As an investor, I would much prefer to pay an initial service charge of 8 per cent and an annual service charge of a half of 1 per cent to obtain the ad- vantage of a unit trust management employing skilled investment analysts, than pay half those charges to have my funds managed by a num- ber of unskilled amateur investment managers.

A greater freedom in management charges would mean that the joint stock banks could offer a competent standard of investment management at low cost and that perhaps a number of smaller unit trusts could offer very highly skilled management at a higher cost. There would, I believe, be a demand for both from the public at large.

I' predict that, apart from the rationalisation of the unit trust movement, the main feature

of the next decade will be an enormous advance in unit-linked assurance plans. It is very attrac- tive for the small investor to be able to save systematically in the form of equities and at the same time enjoy the substantial tax con- cessions that apply to life assurance.

It was natural that the traditional life assur- ance market should put up a long and sustained resistance to the equity-linked life policy. For with the standard with or without profit en- dowment contract there was nothing like the same awareness of the skill of the investment managers as there is with a unit-linked .policy. Nor indeed was there a guarantee to the policy- holder that he would obtain the full benefit of any inflation that took place. The breakthrough point has now been reached. Brokers, bankers, accountants, the press, are all now aware of the existence of unit-linked assurance plans with the assurance aspects organised by reputable and well-known life offices. It is a revolution in the life assur- ance world that I welcome.

In every constituency in the country there are on average 3,000 electors who now have a holding in unit trusts. By 1975 that figure could well be 10,000 and the number with a unit-linked life policy or a direct unit holding could well be 20,000. I find this a very con- soling fact in moments of depression as to the future of free enterprise in Britain.