A. The Trust Corpus and the Cash Fund Concept

The trust is by nature a relationship fastened upon the properties of the trust. Considerable debate has been focused upon the rights of a beneficiary in the trust properties.5 In a private trust, the trust is a means of disposition of properties by way of gift. The trust corpus in the private trust, even when the settlor is one of the beneficiaries, is the subject matter of a gift. In this sense, the trust has a distributive character that makes use of equity’s recognition of a multiplicity of interests within a trust. A beneficiary’s interest is an interest in a gift. His interest is a matter of degree of ownership. If he is a beneficiary under a discretionary trust, he has nothing more than a right to be considered as a beneficiary. If he is an adult beneficiary under a bare trust,’ he almost has full ownership as he can at any time call upon the trustee to assign the property to him. If he is only one of several beneficiaries under a fixed trust, he has rights similar to his counterpart in a bare trust in that he and other beneficiaries collectively, if sui juris, can agree to terminate the trust; otherwise, each will only have an ascertainable interest.

By contrast, a unit trust does not have a distributive character; its trustee does not have dispositive power; the unitholders are not objects of a gift; the moneys in the trust corpus are not gifts. The trust corpus consists of money belonging to the beneficiaries themselves. In substance, unitholders are contributors of capital. Contributions by unitholders are for the purpose of investment, and investment by nature is the use of capital for the purpose of gain, whether in terms of income or appreciation of capital value.

FundsThus, functionally, the trust corpus of a unit trust is the same as the share capital of a company. Their difference is a matter of form. Share capital belongs to the company as a legal person. The legal interest in the unit trust corpus is vested in the trustee subject to equitable obligations, and subject to the investment directions of the manager, but ultimately it is for the enjoyment of unitholders. The company form denies investors ownership of any form in the underlying assets. The trust gives investors equitable rights in a form recognizable by our system of law, though the nature of such rights is still debatable.”

It is clear that the early 1930s witnessed the emergence of three forms of unit trusts, namely, (a) the fixed trust, (b) the flexible trust operating on an appropriation principle, and (c) the flexible trust operating on a cash fund principle. The modern unit trust is a flexible trust operating on a cash fund principle.

The fixed trust was built upon the idea of pro rata ownership in equity of the underlying investment. Under a fixed trust, the manager purchased a block of securities as specified in the trust deed and deposited it with the trustee. The first block was the first unit. Subsequent blocks of units were of matching composition. In effect, a unit was a group of shares and investments and the manager was initially the owner of the whole beneficial interest in the assets comprised in the unit. The trust deed provided that each unit, after the addition of expenses, should be subdivided into sub-units to be sold to investors. Each sub-unit entitled its holder to the beneficial interest in the proportion of one to the total number of sub-units. As the underlying assets were fixed and were variable only in limited circumstances, each unitholder knew in advance the exact underlying investments and the proportion that he owned. To avoid confusing this type of trust with ‘fixed trusts‘ that are not discretionary trusts, it will be called a ‘fixed investment trust‘, a term used by the editor of the All England Reports in Re Whitehead’s Will Trusts. Thus, a fixed investment trust is a particular type of fixed trust.

Under a flexible trust the manager could vary the size, nature, and proportions of the underlying assets at its discretion subject to the terms of the trust deed. Originally, the manager proceeded on the same basis as a fixed investment trust and purchased securities which it deposited with the trustee. It then issued units to be sold to the public. The trust deed of a flexible trust usually provided that the trust corpus could be extended in size. Expansion could be made under either the appropriation principle or the cash fund principle. Under an appropriation trust, the manager had to purchase a block of investments and appropriated to the trust before it issued units. The units in substance were owned by it; when they were sold to investors, the manager was reimbursing itself. Under a cash fund trust, which was a later development, the manager accepted cash from investors and issued units without having first to purchase investments. When units were issued, the proceeds were added to the trust fund as cash for investment.

The emergence of this type of flexible cash fund trust is the most significant step in the development of the unit trust concept. Conceptually, the trust fund has become one of money. In terms of operation, it is a precedent for modern open-ended trusts that permit investors to liquidate their investment by redeeming their units from the trust fund. The number of trust units, and therefore the size of the investment capital, can increase or decrease as circumstances may require. Until the introduction of the open-ended investment company recently, this is an important advantage that the company form fails to provide. This development also witnesses the change in conception of the trust corpus from a specified quantity of specified securities to a cash fund to be managed and to be made productive by the manager. This cash fund principle is the operating principle of modern unit trusts.

In managing the money of the trust fund, it is sometimes desirable for the trustee, at the direction of the manager, to exercise the borrowing power conferred by the trust deed. An overdraft or a short-term loan may be arranged to cover any sudden surge of redemption requests at a time when the manager considers it inadvisable to sell the underlying investments. This type of borrowing to provide liquidity is common for trusts that consist of buildings or assets that are not readily realizable. More often, the nature of portfolio assets may be such that it is in accordance with good management principles to engage in arbitrage or hedging activities in the currency, futures or other financial markets. In such activities, liabilities such as margin calls may be involved. As an investment strategy, all items of assets and liabilities are looked at as components within a portfolio. Each component carries different risk factors and balancing different risks is the manager’s management skill. It is not difficult to conclude that the trust corpus is in reality a capital sum represented by the difference between assets and liabilities.

This capital character of the trust fund is reflected in its accounting treatment. The Statement of Recommended Practice relating to Authorised Unit Trust Schemes issued by the Investment Management Regulatory Organisation requires a portfolio statement, a statement of assets and liabilities (or balance sheet), and an income account for a half yearly report. It requires for an annual account a balance sheet, distinguishing between income and capital account, a portfolio statement and summary of major portfolio movements, an income account, and a statement of movements in net assets. There is also a requirement of provision of comparative figures in the balance sheet. Thus, the required accounting treatment places emphasis on disclosure to investors and is no different from accounts of a company account. The presentation of accounts of non-authorized unit trusts is the same.

To sum up, the trust fund of a unit trust has not much difference from the capital of a company. The moneys are employed to generate gain. This is a big contrast to an ordinary private trust.

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