Clearing up confusion

In his article published on 13 September "The case against unit trusts", Mr Morton is at best confusing and at worst inaccurate.

He compares unit trusts with investment trusts, saying that shareholders in investment trusts can always sell in the stockmarket even if the price is unattractive. This is simply not true. In the worst case, ie 1987, unit trusts did have difficulty selling shares. But those shares included investment trusts. In normal circumstances unit trusts must be fully liquid, investment trusts may be if they are large; many are not and suffer illiquidity and high spread.

He says the high turnover within a unit trust portfolio also has a detrimental effect on long term performance. Maybe, but surely the same can be said for any portfolio – an investment trust, a private portfolio or a pension fund. The evidence is that the investment performance of unit trusts and investment trusts, ie ignoring charges in the discount of investment trusts, is identical.

He says unit trusts can be expensive – quoting a 9.5 per cent bid-offer spread guideline set by the DTI. The DTI guidelines ceased to exit in 1989!

What Mr Morton says about moving the quoted spread from one end of a band to another is true. Indeed, this is the way unit trust managers ensure that investors in unit trusts can buy or sell at a fair price when they want to and that the existing holders' performance is not impaired. It is an identical mechanism to an investment trust market maker moving his price in the face of demand to buy or sell. But in the case of unit trusts it protects the fund rather than the market-maker's book.

Victoria Nye

Director of communications

Association of Unit Trust and Investment Funds

London WC2