Resources

Investors' Rights And Unit Trust Funds
September 2009 | Funds, Private Equity & Venture Capital | Corporate | Business Bulletin

Introduction

Since the collapse of Lehman Brothers in September 2008 and the ensuing financial crisis worldwide, and given the rapid depreciation of most asset classes, investors today are first and foremost concerned with recovering their investments.

In the recent examples of the High Notes and the Pinnacle Notes series, both of which were structured products, investors were left with limited recourse against the parties who sold them the investment products. Their rights to recover their investment sums were severely limited by the contractual terms applicable to the subscription of such investment products.

Up till the end of June 2009, it was the norm for investors to receive bad news regarding their investments. This trend was broken recently when investors in the GreatLink Choice were offered the option to redeem their investments, and to be repaid their original investment sums, less any dividend previously paid out. This move was enthusiastically received by the investing public, who heaved a collective sigh of relief given the earlier futile attempts to recover investment sums from similar investment products.

The redemption offer made to the investors of the GreatLink Choice was not a contractual right pursuant to the terms of the subscription documentation. The unusual offer was an extraordinary example of the terms of subscription of an investment product being varied.

Investors should therefore always examine their rights when making an investment and, in light of the current global financial situation, understand their rights with respect to the recovery of their investment sums or liquidating their investment.

Unit trust funds

Unit trust funds are one of the most common investment products available to the mass market, with some funds requiring a minimum initial investment amount of only S$1,000. Furthermore, unit trust funds usually hold a mixed and diversified portfolio of assets, which enable such funds to weather unexpected swings in asset values. Unit trust funds therefore provide investors with a long-term investment platform coupled with the ability to liquidate their investments quickly. It is therefore useful to understand the different types of unit trust funds and how investments in such funds may be liquidated.

Funds with daily dealings

Unit trust funds may be structured in various ways. For example, there are the usual "plain vanilla" type unit trust funds which allow daily dealings. An investor can request to redeem his units in the fund on a daily basis, and the redemption amount depends on the net asset value of each unit in the fund based on the value of the underlying assets. If the value of the underlying assets is depressed, then the investor may not be able to recover his original investment sum. Usually, an investor in such open-ended funds may still recover a portion of his original investment sum.

Funds with protection feature

Some other unit trust funds are structured with a protection feature. This means that the fund manager will structure the fund's underlying investments so as to afford a certain degree of protection to the value of the units in the fund. This, in effect, protects the investment sum paid by an investor. Such a protection feature serves only as a form of reassurance because the original investment sums are not guaranteed. When units in such a fund are redeemed, the redemption amount is still based on the net asset value of the fund, which may be equivalent to the original investment sum due to the protection feature employed by the fund manager

Funds with guaranteed features

The other type of unit trust fund is one with a guaranteed feature. As the name implies, this type of unit trust fund guarantees the return of a certain amount of the investor's investment sum. This guarantee is built into the contractual documents of the unit trust such that the guarantee is enforceable by the investor. Such guarantee features may cover 100% of the original investment sum or it may cover a lesser percentage. The guarantee is usually dependent upon the investor not redeeming his units in the fund until a stated maturity date. An investor who redeems his units in a guaranteed unit trust fund prior to the maturity date will be paid a redemption amount which is equivalent to the current net asset value of the fund, which may be lower than the guaranteed amount.

Conclusion

Unit trust funds therefore give investors the ability to choose when to liquidate their investments. Such funds are likely to continue to grow and remain popular among investors, especially in these times of financial uncertainty.