Unit trusts underlying REIT via managed funds

Evolution to Philosophy of Unit Holder

If you'd like to gain exposure to a range of investments with a relatively moderate or less extreme amount of money, managed funds could potentially be a proper option.

Managed funds pool together the money of individual investors and use it to buy assets such as domestic or international shares, bonds, property or cash. Different funds have different objectives so it's important to assess whether they match your own objectives from the outset.

Investments shall be processed in both actively managed funds, where the manager selects the stocks based on their own convictions, and passively managed funds, which tend to be lower cost and aim only to match the performance of a benchmark, rather than beat it.

Investing in Managed Funds

When you invest in a managed fund, you hold units in the fund, being a Unit Holder. The unit price, or value of each unit, reflects the market value of the assets held within the fund at any given time.

Apart from capital growth — when the unit price increases — Unit Holder may earn income in the form of dividends or interest when the fund makes profits from its assets.

Your fund manager will pay you the income (distributions), according to a specific schedule and you may have the options of receiving cash on redemption or reinvesting your income into the fund. The latter allows you to own additional units without having to put in more money.

Benefits

A managed fund can provide you access to different companies, industries and – different countries.

Since you're basically sharing the investments with other Unit Holders, the entry cost tends to be lower than buying shares directly. You may also be able to make additional contributions on a regular basis without being charged.

The fact that the pooled capital is usually spread across different investments can help mitigate the risk of certain assets performing poorly.

Disadvantages

Just like any other form of investment, managed funds are exposed to different levels of risk. It's vital to determine your investment goals and understand your risk appetite before investing.

It's also important to recognize that actively managed funds do not always outperform the benchmarks that they aim to beat and you could lose money by investing in them.

Authorised Investments

Each Fund may only invest (directly or indirectly) in Authorised Investments, as described in its Unit Trust schedule.

Due different investitures to authorized Funds - Fixed Interest Fund, Balanced Fund, Equity Selection Fund, Property Securities Fund - may invest in:

• deposits with or loans to any person
• debentures, bonds, notes, debt securities or similar obligations issued by any person
• bills of exchange or promissory notes made, drawn or accepted by any person
• units, sub-units or other interests in unit trust schemes, group investment funds or similar undertakings or schemes
• stocks, bonds, mortgages or securities of, or deposits with, any government, public, municipal or local body or authority
• share securities or like interests in any company, partnership or another person
• any futures contract, foreign exchange contract or arrangement for hedging or reducing any market movement risk or another financial risk
• rights or options to acquire or to take up any of the above, and
• investments of any kind approved for the time being by the Trustee.

In addition, the Fixed Interest Fund and Balanced Fund may invest in mortgages of real property. The Balanced Fund may also invest in any interest in land. The Equity Selection Fund may also invest in swaps, options, derivative contracts for replicating market positions, or enhancing returns.

The Property Securities Funds may invest in:

• deposits with or loans to any person
• debt securities issued by any person
• stocks, bonds, mortgages or securities of, or deposits with, any government, public, municipal or local body or authority
• shares, units or other interests in any company, unit trust or another person whose principal business is the development of, or investment in, real estate and which is listed (or has announced an intention to list) on the authorized Stock Exchange
• futures contracts, foreign exchange contracts and options, interest rate and currency swap contracts or options entered into for the purpose of hedging other transactions permitted by the Trust Deed
• any right or option to acquire or to take up any of the above, and
• units in Unit Trusts.

The objectives of the Fixed Interest Fund are to:

• Outperform the S&P/ Government Bond Index (with imputation credits re-invested, if and where applicable)
• Generate a steady income return
• Preserve investment capital.

It may also invest in fixed interest assets issued in the authorized platform by international companies, international fixed interest assets (fully hedged back to the authorised currency) and cash assets.

Funds may gain exposure to the asset classes above:

• directly (by buying the asset), or
• indirectly (by investing in other funds that hold assets, or by entering into derivative contracts).

The various asset classes may be managed by the Manager or by externally appointed managers. Where the Funds indirectly invest by investing in other investment products (including by investing in other funds managed by the Manager), the Funds and their Unit Holders will be exposed to the investment management activities implemented by those investment products. Those investment products may have greater flexibility regarding the use of derivatives and borrowing than the Funds themselves and may enter into securities lending, repurchase and other transactions.

A Fund may use derivatives or borrow where the Trust Deed, its Unit Trust schedule and any current Statement of Investment Policy and Objectives (SIPO) or Investment Guidelines or any similar document permits.

Unit Holder liability

Unit Holders do not incur any liabilities (including contingent liabilities) from holding Units in a Fund, other than:

• the liability to pay the entry price, and
• tax liability which a Unit Holder may incur personally if the Unit Holder:
• is a “zero-rated Unit Holder”
• is a tax-paying Unit Holder and advises the wrong PIR or IRD number, or
• fails to advise the Manager when their PIR increases.

Joint Unit Holders

Unit Holders that invest jointly with another person with the same PIR should tell the Manager which Unit Holder to attribute the income to and the applicable PIR. If their PIRs are not the same, the Manager must attribute the income to the Unit Holder with the highest PIR. If the Unit Holder does not make a selection, the Manager attributes the income to the first named Unit Holder at the default rate.

Understanding risk

Understanding and managing risk is the cornerstone of any successful investment philosophy, so it’s very important investors become familiar with the concept of risk. Risk is the chance that an outcome, the change in value or income received from an investment, will be different than expected, and includes the chance that what a Unit Holder receives back on their investment will be less than they expect and may involve the loss of some or all of the money they have invested.

The Fund(s) which Unit Holders choose should reflect their investment objectives, risk profile and investment timeframe. Returns and the value of Unit Holders’ investment in the Funds are not guaranteed by any person, and there may be losses or gains on a Unit Holder’s initial investment. The value of a Unit Holder’s investment can go up and down. An investment in the Funds involves risks, including those inherent in any investment. This is not an exhaustive list and there may be additional risks that arise. Before investing it is important to consider which Funds are best suited to the prospective Unit Holder’s financial circumstances and investment objectives. A prospective Unit Holder should consider taking professional advice from an authorised financial adviser before making an investment in the Funds.

All investments have a potential return and carry a corresponding level of risk. The risks of investing in a Fund include:

• not achieving the returns a Unit Holder expects
• a Unit Holder not receiving back all or any of their investment
• a Fund becoming insolvent.

Understanding the risks that apply to each Fund

The Manager believes that the most significant risks for a Unit Holder in the Funds will usually fall into the following broad categories:

• asset class risks – risks from the asset class or classes a Fund invests in
• investment management risks – risks that arise because of the way the Funds are managed
• general risks – risks that apply to any investment in the Funds

These broad risk categories, and how the Manager mitigates them, are described below but not limited.

Asset class risks

Different asset classes have different risks. Different asset classes have different levels and types of risk. Share and listed property assets are considered to be riskier than cash and fixed interest assets. These characteristics mean that Funds with larger portions invested in share and listed property assets are typically exposed to more risk than those Funds with larger portions invested in cash and fixed interest assets.

Investment management risks

The way the Manager manages the Funds gives rise to some specific risks from active management, currency rate changes, and its use of derivatives.

Active management risk

All of the Funds are actively managed. The aim of active management is to have better investment performance than a particular index or market. Passive management, by contrast, tries to accurately track a particular index or market. Active management risk is the risk that the Funds perform worse than the particular index or market because of poor investment decisions. With active management, the Manager risks:

• choosing investments that underperform the particular index or market
• mistiming market changes.

An active management approach can lead to better investment performance than passive management. The Manager seeks to mitigate active management risk by employing investment professionals who have successfully applied a consistent investment strategy over a number of years.

Currency risk

Different Funds are exposed to currency risk. The extent of each Fund’s exposure varies.

Currency risk is the risk of changes in currency exchange rates. The Funds face currency risk when they invest in international assets that are denominated in foreign currencies. The Manager seeks to mitigate currency risks for the Funds by hedging currency exposure from foreign fixed interest assets, foreign listed property assets, and for some of the currency exposure from foreign share assets.

The Fixed Interest Fund and the International Property Fund, and (to the extent relevant) the Property Securities Fund are usually fully hedged back to authorised currency. The Manager seeks to actively manage the currency risk for these Funds and (to the extent relevant) the Balanced Fund and the Equity Selection Fund, by adjusting the level of our currency hedging depending on the Manager’s view of the relative strength (or weakness) of the authorised currency.

Risks associated with derivatives

The Funds can invest by entering into derivative contracts. The value of a derivative is usually linked to (that is, derived from) changes in the value of another asset, an index (such as a share market index or a commodity index), an interest rate, or a currency exchange rate.

Specific risks with derivatives are:

• losses because of changes in the value of the underlying assets, indices or rates
• losses if the other party to the derivatives contract fails to meet its contract obligations
• exaggerations in the effect of any increase or decrease in the value of the underlying assets, indices, or rates.

The Manager seeks to mitigate these risks by:

• taking into account the financial strength of any counterparties to derivatives contracts, and
• monitoring to make sure that the Manager is using derivatives in accordance with the SIPO.

General risks and Changes to the Funds

Due general risks the Manager can make changes to the Funds, provided that those changes are allowed by the Trust Deed. These changes might include changes to a Fund’s:

• SIPO (including the underlying investment funds and underlying investment managers for each Fund, as well as the asset class or geographical focus of a Fund)
• fees and expenses
• minimum investment amounts.

The Manager can also add, close, or wind up Funds. These changes may affect the level of risk and returns Unit Holders can expect.

Personal liability

There are no circumstances in which Unit Holders will be obliged to pay any further money, apart from:

• any tax liability in respect of income attributed to the Unit Holder over and above the value of the Unit Holder’s Units in the Fund
• any tax liability a Unit Holder incurs personally as a result of being a “zero-rated investor” or as described under the Tax risks.

In particular, a Unit Holder will not be liable to pay money to any person as a result of the insolvency of the Manager or a Fund. By investing in the Funds, each Unit Holder agrees to indemnify the Trustee and the Manager for any shortfall if the balance of their investment is insufficient to meet their attributed tax liability arising from tax payable on their behalf.

The Fund(s) can be closed and wound up

The Manager may wind up a Fund (or all of the Funds) if it decides to do so, after giving all required notices. If a Fund is wound up, after the payment of all creditors, costs, and liabilities of the Fund, the Trustee will distribute any remaining money or assets to Unit Holders in proportion to the Units they hold in that Fund (subject to any adjustments for tax). Unit Holders in a Fund will rank equally (among themselves) if the Fund is wound up.

Other risks

The risks described above are the main risks that apply to an investment in the Funds. There are some other material risks which apply to an investment in the Funds, as set out below:

• In certain circumstances, the Manager can suspend or defer withdrawals from a Fund.
• Operational or systems failure may affect the Funds or financial markets.
• The Trustee or the Manager (as applicable) may, subject to Trust Deed provisions, borrow. This may exaggerate the effect of any increase or decrease in the value of a Fund’s assets and increase the risk of insolvency. The Manager does not intend to direct the Trustee to borrow money for any of the Funds other than short-term settlement related overdrafts.
• Changes in tax or other legislation may impact the returns received by Unit Holders.
• Tax risks, which include the risks described below:

PIEs have restrictions on the percentage of Units any one Unit Holder (and associated parties of that Unit Holder holding interests of 5% or more) can hold. Generally, no Unit Holder, together with such associates, can hold more than 20% of a Fund (although this restriction does not apply to Unit Holders who are other PIEs or fall within a narrow class of other specified entities). The Funds may redeem or nullify certain Units exceeding the permitted threshold so as to ensure PIE status can be maintained. If a Unit Holder’s Units are nullified, they will receive a refund of their subscription money, but any additional compensation is at the discretion of the Manager.