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How safe are my New Star unit trusts?
Unit trusts and open-ended investment companies (OEICs) operate under well-defined rules. Investors buy units in a unit trust, which is managed by a fund management company. There has to be a clear separation between fund management companies, such as New Star, and the unit trusts, which belong to investors. The fund manager has no authority over investors' holdings. If a manager goes bust, or cannot continue for other reasons, the trustee or depositary (for an OEIC) has to take over running the funds and it is their duty to find another management company.
Who are the trustees?
There are about six trustee/depositary firms in the UK, of which the biggest are Royal Bank of Scotland, Citigroup, Bank of New York and HSBC. They ensure that investors' monies are held in a ring-fenced account that cannot be accessed by fund management. The trustee itself can only take money from the account to pay investors wanting to sell units and for fund managers' fees. Investors' money does not pass through the fund manager's books.
Can I still buy and sell fund units?
Yes, contracts to buy or sell investments are with the trustee/depositary and dealing should continue, even if a fund manager collapses. Cheques for unit encashments will come from a separate account, which administrators or liquidators of the fund manager cannot touch. Those investing via fund supermarkets should get sale proceeds from the supermarket. But as investors are likely to shun firms with uncertain investment management, the unit price could be on a "bid basis" — in effect 5% lower than usual — to reflect managers' inability to find new investors to replace those leaving. Investors with monthly savings plans will continue to invest until their direct debit stops.
What if a fund manager goes under?
Trustees or depositaries will generally put the contract out to tender to find a new fund management group, which would then take over the running of the unit trusts. Another established management firm would be likely to take over day-to-day running of funds.
Has this happened before?
Investment management firms have rarely hit trouble. The only unit trust firm to have gone bust was Barings, which was brought to collapse by the rogue trader Nick Leeson in 1995. But the fund management arm (and its investors) were unaffected and the firm still trades under its own name. In 1996, Morgan Grenfell found its "star" manager Peter Young had defrauded its European fund. The ultimate owner, Deutsche Bank, took the loss on its balance sheet, so no investor lost out.
What about the compensation scheme?
The Financial Services Compensation Scheme would only pay out if there was mismanagement by the depositary or trustees. Investors could also claim compensation if they were mis-sold an inappropriate fund, as happened with several high-risk split-capital funds five years ago.
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