Shortly after Charles was decided by the High Court of Australia, another fixed investment trust was the subject of taxation proceedings. This time, it was before the Supreme Court of Canada in MNR v. TransCanada Investment Corporation Ltd. The trust was a typical fixed investment trust. Under the trust deed, an administrator (i.e. the manager) was to purchase a fixed number of predetermined shares of common stock of companies to constitute a trust unit. Upon all the shares of underlying companies of a unit being vested in the trustee, the trustee would issue shares of a trust unit. Each share of a trust unit represented an undivided equal interest in the unit. Read the rest of this entry »
B. Baker v. Archer-Shee in Unit Trusts
So far, the position is this. With regard to the number of beneficiaries, the effect of Nelson v. Adamson and New Zealand Insurance Co. Ltd. v. CPD is that Baker is not limited to trusts with one beneficiary and the existence of a number of beneficiaries, whether in successionor concurrently, does not affect their respective claims to proprietary interests in the subject matter of a trust. Ironically, the expansive application of Baker was achieved in New Zealand Insurance only at the price of admitting that a beneficiary may not have a proprietary interest in the trust assets in some fixed trust situations, such as where the beneficial interest is ‘a specified sum to be provided out of an unidentified part of a body of assets‘. Read the rest of this entry »
The question before the court was the liability of the trustee to income tax on the interest. The relevant tax legislation made no provision for the deduction of tax from payments of income out of trust estates. The trustee argued, relying on Baker, that the liability to tax of income received by trustees depended upon the position as regards liability of the beneficiary; that in this case the interest received was treated as capital as a matter of ordinary principles of accounting between trustees and income- beneficiaries; that the beneficiaries would never receive the interest as income and therefore no liability to tax was possible. It was held by the Scottish Court of Session that on construction of the statute the interest was income and the trustees were the persons receiving or entitled to the income. Read the rest of this entry »
On the question of the rights of unitholders in the underlying assets of the trust fund, there are two strands of authorities that may be relevant to our understanding. In the first place, as the vast body of trust law is derived from trusts used in family dispositions, the line of cases after Baker v. Archer-Shee will be relevant. Indeed, Baker has been applied in commercial trusts and none of the decisions finds it necessary to distinguish the commercial from the family situations. Deed of settlement companies can be regarded as the origin of modern unit trusts, both in form and substance. The approaches of cases on such companies will illuminate our analysis. Read the rest of this entry »
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. Read the rest of this entry »
The swap terms available to the insurance company are as follows:
- Every six months the life insurance company will pay LIBOR.
- Every six months the life insurance company will receive 8.40%.
What has this interest-rate contract done for the bank and the life insurance company? Consider first the bank. For every six-month period for the life of the swap agreement, the interest-rate spread will be as follows: Read the rest of this entry »
So far we have merely described an interest-rate swap and looked at its characteristics. Here we illustrate how they can be used in asset/liability management. Other types of interest-rate swaps have been developed that go beyond the generic or “plain vanilla” swap described and we describe these later.
An interest-rate swap can be used to alter the cash flow characteristics of an institution’s assets so as to provide a better match between assets and liabilities. The two institutions we use for illustration are a commercial bank and a life insurance company. Read the rest of this entry »
Client research by Benefits, Inc. shows that plan participants may be usefully grouped into three major segments based on their attitudes toward, and sophistication with, investment concepts. Plan sponsors should consider positioning options to relate to the needs of each segment.
Insecure investors usually compose the largest single participant group. These individuals describe themselves as “beginner” investors. They express a lack of confidence and understanding in matters related to investing and doubt their ability to accumulate enough assets to retire. Their lack of confidence has pushed them into relatively safe investment choices such as money market, fixed income and stable value options. They tend to be the least well diversified. Some avoid participating in a 401(k) plan altogether because of their lack of confidence. Read the rest of this entry »
The pricing and bookkeeping agent is responsible for maintaining the fund’s accounting records, pricing the fund’s portfolio each day, calculating periodic distributions, determining the fund’s cash availability, preparing financial statements and filing the fund’s tax returns. A fund’s accounting records are very similar to those of a small corporation, consisting of revenue, expenses, assets, liabilities and shareholder’s equity. The pricing and bookkeeping agent is responsible for maintaining these records each day. The accounting records are the basis for calculating the fund’s NAV, the price at which shareholders buy into and sell out of the fund, as well as for determining the distributions the fund makes to its shareholders. Read the rest of this entry »
Driven by a combination of management-initiated efforts to improve defined contribution plans and increasing employee bottom-up requests for a wider array and range of investment options, the average number of choices offered by Benefits, Inc. clients is now 10, compared to 3 or 4 choices 10 years ago. Indeed, many large companies offer 75 or more options. However, a concern is whether these additional options are being used properly. Read the rest of this entry »
This article has been compiled with the help of Arthur Andersen, particularly Victor Levy of Arthur Andersen’s Financial Services tax practice in London. It covers the taxation of futures funds and derivatives in a broader sense for the leading European markets. The author would like to thank him and the European offices of Arthur Andersen for their help.
In Belgium, the law of December 1990 regulated in an extensive way the status of investment funds (initially covered by the law of 1957) and created two new types of investment companies: the SICAV and the SICAF. The SICAV is the société d’investissement a capital variable, while the SICAF is the société d’investissement a capital fixe. Read the rest of this entry »
The policy of most jurisdictions is to treat the mutual fund as a company subject to corporate or income tax only on its ordinary business (i.e. net income arising from holding investments), and exempt it from taxation on its gains from buying and selling investments. In the US, provided the gains and net income are distributed, the fund does not pay federal income tax on either. Taxes are the responsibility of and paid by the shareholders under a ‘pass-through’ arrangement, whether they choose to receive cash or reinvest their entitlement. Read the rest of this entry »
Mutual funds are used by private investors and by institutions for different but overlapping reasons
Private investors use mutual funds to invest money in the hope that it will:
- grow in value, or
- provide income, or
- deliver both, i.e.. capital growth and income either to serve specific financial needs, now or in the future, or simply to enhance their prospect of wealth.
Institutions, particularly life companies and pensions funds, use mutual funds as a convenient way to organise and manage some if not all of their investment portfolios, which will have objectives similar to those of the private investors who are the ultimate beneficiaries. Read the rest of this entry »
Buying and selling
Although some funds are exchange-traded, the shares or units of most mutual funds are bought and sold by making an application to the manager. This can be in writing, by telephone or via the Internet, directly by the investor or by the investor’s adviser or agent. Many managers have pre-printed application and redemption forms and their advertisements and other promotional mailing material often include an application form. Once accepted by the manager, applications constitute a binding contract, and the manager issues a contract note stating the details of the transaction.
For purchases, payment can be included with the application. Some managers may insist on this for the initial investment of a first-time investor. Alternatively, the contract note will specify when payment is required. For large investments, the manager may be required by law to obtain confirmation of the investor’s identification and of the source or destination of money involved in the transaction: if there is any suspicion that the money is being laundered, or used to support terrorist activity, the suspicion must be reported to the authorities. Read the rest of this entry »
Investors should routinely review the performance of their investment in a mutual fund; there are, however, some factors that need to be considered and understood, as regards both the preparation and the use of statistics. The most readily available performance statistics are compiled to generate a’league table’ based upon the value of an investment after given time periods since the date of initially investing a particular sum of money, say 1,000.
The numbers are calculated assuming the initial investment is made at the buying, or offer, price and the number of shares thus acquired are valued at the current selling, or bid, price. To avoid distortions caused by different patterns of income, the numbers are adjusted on the assumption that any income entitlement is reinvested at each date during the period when the fund made an income distribution. This overall approach is cited as being on the basis of ‘offer to bid, income reinvested’. Read the rest of this entry »
Institutions obtain administrative and, sometimes, taxation benefits by using mutual funds to manage their own assets. Such funds are invariably not available to the general public. Funds that are authorised to be promoted to the general public (frequently referred to as ‘retail funds‘), usually extol the benefits to the private individual, namely:
1. Small investment required
Although both minimum holdings and minimum initial amounts are usually required, individuals can invest comparatively small sums of money in mutual funds, particularly through plans that accept regular subscriptions. So-called ’small investors‘ can thereby obtain the benefits of worldwide economic activity (hopefully growth) rather than allowing these to be enjoyed by the banks (and their shareholders) and others with whom they deposit their funds in return for an interest income. Read the rest of this entry »
Once a mutual fund is authorized, it is launched to potential investors by way of an initial offer of shares or units at a fixed price. The terms of the offer are restricted by regulations, which cover matters such as how long the initial offer period may last and the circumstances that require it to close.
The fund or its management company may set a minimum and a maximum target of capital to be raised, and the prospectus must explain what will happen if those targets are not reached or are exceeded.
The launch is usually accomplished by making announcements in the press, mailings to prospective investors, launch briefings for advisers and agents, and advertisements. Although not permitted in the US, some countries allow advertisements to solicit money ‘off the page’ by inclusion of an application form. Nowadays, this extends to advertising and making investment via the Internet. Read the rest of this entry »
