Page 71 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Costs and Pricing

Knowing your ABCs
Historically, unit classes have followed tacit rules: A for retails funds, B and C for institutional
funds, and so on. It’s important to note that these “rules”are not an industry requirement –
managers can in fact use any letters or numbers to differentiate unit classes. (The only
exception is R, which denotes a regulated class and identifies fund classes established before June
1998.) Exercise caution, therefore, before drawing conclusions about retail and institutional classes
based on alpha codes.

Unit Classes
While looking at pricing, it must be noted that a collective investment scheme can have
different classes of participatory interests. Looking at this from the point of view of unit trusts,
these are usually known as A, R, B and C classes, although a fund is not restricted to these classes,
and can create others.
Different classes of units arise where a manager wants to apply different charges to different
types of investors in the same fund.
Institutional and Clean Classes
B and C unit classes (amongst other letters) are generally based on fee structures applicable to
institutions and other wholesales clients, such as LISPs and investment platforms.
The “institutional” classes typically offer discounted fees. For example, a fund that charges retail
investors a 1.14% annual fee (via the A unit class) may charge an investment platform only 0.68%
via a B unit class.
Although unit trust annual fees are often thought of as investment management fees, the
charges levied by the manager may contain other elements. Many annual fees actually consist of an
investment management portion and an administration portion, for example. The admin portion
may be paid as a rebate to a LISP or investment platform by the manager because the LISP is
relieving the manager of a large part of the administrative burden (the LISP puts through bulk
transactions, meaning the manager does not have to deal with many individual investors).
A “clean class” is defined as one that does not contain any fees other than the investment
management fee. Or to put it differently, a clean class is a unit class which does not contain any
portions that might be paid as a rebate to a platform or LISP. From an investor’s point of view, the
disclosed fee of a clean class is all being retained by the manager – there is no hidden portion being
paid to any other service provider.
A and R Classes
In terms of changes approved by the FSCA which came into effect on 1 April 2000, unit trusts
were permitted to apply different fees to different investors in the same fund. Some management
companies introduced up to four tiers of charges.
Deregulation of charges was in fact first implemented in June 1998. New funds created after
June 1998 were given permission to set their own fees (ie, they were not limited by the Unit Trusts
Control Act), and they were free to vary fees provided they notified unitholders.
Existing funds, however, were only permitted to change their fees if they obtained the approval
of unitholders. Existing funds lobbied for the same flexibility as new funds (ie, the freedom to vary
their charges). Under the old system, unit trusts were obliged to offer the same scale of charges to
all investors, and many management companies wanted to be able to offer reduced fees to
institutions without reducing fees to individual investors.
As a result of these pressures, unit trust fees were further deregulated from April 2000.
In order to protect pre-2000 investors, management companies may not increase the fees of those
unitholders. A fund established before 1998 that wants to increase fees has to have two structures:
it has to preserve the old structure (usually as Class R fees), and must then introduce a new scale
(usually Class A fees) to apply to new investors. All of these changes can apply to both initial
charges and annual fees.

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Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts