How Unit Pricing Works
Trust Management Educational Series
This article seeks to provide some detail and explanation about Unit Trust structures and how unit pricing works. The paper aims to provide a basic oversight of the topics mentioned, using simple terminology in easy to understand language. The paper is not intended to be the definitive guide on Unit Trusts.
A unit trust is a mechanism to keep track of how much each individual investor has invested in a Fund and to provide a mechanism to allocate returns equitably across all investors.
When you invest in a Unit Trust you buy "units". The cost of each unit is the unit price. When a Fund is first established every investor will be allocated 1 unit for every dollar invested in the Fund (i.e. the unit price is $1 on day one).
The unit price moves up or down on, to reflect the value of the investments in the Fund. The value of the assets is always directly represented by the total number of units multiplied by the unit price.
To give a simplistic example;
At the start of a year, 10 investors pool $1,000,000 each into a Fund. The unit price is $1 and each investor is given 1,000,000 units.
After six months, the value of the investments has risen to $15,000,000, the unit price increases to $1.50 ($15,000,000 divided by 10,000,000 units).
It can become increasingly difficult to keep track of each investors entitlement as investors put in more money or withdraw money from the Fund, this is where a Unit Trust is particularly useful.
To continue our example;
Lets assume that after 6 months, half of the investors want to invest an additional $1,000,000 whilst the other five investors do not want to invest any further funds.
The five investors who wished to invest an extra $1,000,000, would be allocated units based on the cost of the unit price at the time of purchase, i.e. the investors are now paying $1.50 for each unit so they will receive less than 1,000,000 units, they will receive 666,666 units.
These five investors will then hold a total of 1,666,666 units each (their initial 1,000,000 units plus the new units issued) and the other five investors will hold their initial 1,000,000 units each. So in total there are now 13,333,330 units on issue and the value of the investments is worth $20,000,000 (being the initial $10,000,000 which increased in value to $15,000,000 plus the extra $5,000,000 of cash tipped in by the additional units purchased).
When we look at the impact of the extra $5m invested on each of the unitholders we see that the unit price remains $1.50 ($20,000,000 divided by 13,333,330 units) so all unitholders have been treated equitably and all investors will share in future returns in a portion equal to the amount they have invested.
When you have a Fund with investors regularly withdrawing and investing, a unit pricing structure supported by a robust registry system is the most efficient and equitable way of allocating returns.
We hope this article has helped to explain what can be a complicated topic. If you have any questions please do not hesitate to contact Shane Coward, General Manager 09 550 4045.
This paper seeks to provide some detail and explanation about unit pricing. The paper aims to provide a basic oversight of the topics mentioned, using simple terminology in easy to understand language. The paper is not intended to be the definitive guide on unit pricing. We recommend investors seek advice before investing.