Under the Financial Services (Regulated Schemes) Regulations 1991, there are many situations where the trustee has to obtain the ‘consent‘, `approval’ or ‘agreement‘ of the manager, and vice versa. There are also provisions that require a party not to act without ‘consulting’ the other party.
For example, the manager ‘may instruct’ the trustee to create and to cancel units but the trustee may refuse to follow these instructions `[w]here . . . the trustee is of the opinion that it is not in the interests of participants‘. Similarly, the trustee may refuse to comply with the manager’s instructions to create units in exchange for assets if the trustee is not satisfied that there is no ‘material prejudice to the interests of participants or potential participants’. Read the rest of this entry »
This covers the situation where the unit trust deed directs the appointment of agents or delegates in certain circumstances and the trustee or the manager is given no discretion. In some offshore unit trusts, the appointment of a custodian or investment adviser in certain markets or abroad may be made mandatory by the trust deed. Sometimes, an investment adviser’s contract may have been entered into prior to units being offered to the public. Thus, a property manager may have been appointed for a property trust. It is also very common for advisers to be appointed for futures and options funds, country funds, and trusts of specialized sectors. Read the rest of this entry »
This covers the situation where the trustee or the manager is given the discretion to delegate all or some of the duties and powers to a third party if it so wishes. In this sense, delegation permitted in equity or under the Trustee Act 1925 is permissive in nature.
For an authorized unit trust, the position is governed by regulation 7.15 of the Financial Services (Regulated Schemes) Regulations 1991. In general, subject to two broader categories of restrictions, and also subject to any restriction in the trust deed, both the trustee and the manager are permitted to delegate any of their functions to any person, including the trustee and the manager themselves. The delegation permitted by this regulation is not confined to ministerial acts but extends to any discretion. Read the rest of this entry »
A. Delegation Without Express Provisions
The contractual nature of the unit trust means that there are matters in which the trustee and the manager have interests as contracting parties. Thus, the distinction drawn by the law between beneficial and fiduciary powers is important. In relation to beneficial powers, the trustee can delegate without express authorization in the unit trust deed. I For fiduciary powers, the trustee will be in the same position as the trustees of private trusts. Read the rest of this entry »
Trust cases have demonstrated that the court is very reluctant to make an agent of a trustee liable to the beneficiaries directly on the basis of constructive trust. The agent will not be liable for merely carrying out the instructions of the trustee, even when it knows that the property is trust property. There must be a want of probity on its part.” One cannot expect an agent to make detailed investigations to see whether or not its principal is validly appointed or whether or not its principal is properly exercising its power. After the decision in Royal Brunei Airlines v. Read the rest of this entry »
There are several ways in which the court may hold that delegates or agents owe duties directly to the unitholders.
In the first place, a custodian having the title of the unit trust property registered in its name is a trustee in equity. If it does not have any power to deal with the property or any other responsibility, it will be a bare trusteeof the property obliged to deal with it as the trustee or the manager may direct. Read the rest of this entry »
If the unit trust deed directs the trustee or the manager to obtain the advice of a certain person on certain matters, such advice will often be construed as a condition precedent to the exercise of the substantive power in question. Obvious examples are the requirements of legal advice, valuation, and actuarial advice.
The powers of appointment of such advisers are fiduciary powers and therefore not delegable. However, this does not preclude the trustee from making enquiries, seeking information or asking for a character reference about a potential adviser so long as the ultimate decision is its own. In making this selection, the trustee or the manager must exercise due care and diligence. Read the rest of this entry »
It is established that the powers of the manager are not delegated powers derived from the trustee; the manager is a primary source of authority, having been responsible for the set up of the unit trust. However, despite this stated position, it is submitted that the trustee has reserve powers incidental to its status as a trustee by reason of its legal ownership of the properties and equity’s imposition of duties on such an owner. The position appears to be that if the manager cannot find authority for a particular act in the express or implied powers of the unit trust deed, the manager cannot do the act. The unit trust deed is the source of the manager’s authority. 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 »
B. Rights in a Unit: A Preliminary Analysis and Three Propositions
A modern trust deed invariably provides that the trustee will hold the unit trust assets for the unitholders ‘on and subject to the terms and conditions of the trust deed‘ and in the case of an authorized unit trust, the regulations made under section 81 of the Financial Services Act 1986.It is always possible for the trust deed or the relevant regulations to contain hundreds of covenants or terms that may alter or add to the rights in the beneficial interests of the trust assets. With the varieties of unit trusts and the varieties of units in the market today, the significance of the qualifying statement ‘on and subject to the terms and conditions of the trust deed‘ may easily be overlooked. 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 »
Management’s income is usually based on a percentage of the market value of the securities in the fund. The larger the asset base is, the greater the income. Both open- and closed-end fund managers are (at least theoretically) compensated to provide superior investment performance. If the value of the assets being managed grows, the management fees expand proportionately. In addition to pressures associated with performance, the open-end fund manager is faced with problems that can arise form variable capitalization.
Statistically, there is virtually no question that the popularity of both closed-end and open-end funds varies with market conditions. When the market is high, especially during periods of excessive speculation, open- end mutual fund sales increase (sometimes very dramatically), and there is an increase in the number of new closed-end funds. When the market is depressed, open-end sales decline (sometimes redemptions dominate), and there are few new closed-end funds formed. Read the rest of this entry »
A collateralized debt obligation (CDO) is backed by a diversified pool of one or more types of debt obligations (e.g., U.S. domestic investment-grade corporate bonds, high-yield corporate bonds, emerging market bonds, bank loans, asset-backed securities, and residential and commercial mortgage-backed securities). The funds to purchase the collateral assets are obtained from the issuance of bonds. There is a collateral manager responsible for managing the collateral of assets.
A CDO is classified as a cash CDO or a synthetic CDO. The adjective “cash” means that the collateral manager purchases cash market instruments. A synthetic CDO is so named because the collateral manager does not actually own the pool of assets on which it has the credit risk exposure. Stated differently, a synthetic CDO absorbs the credit risk, but not the legal ownership, of the reference obligations. A credit default swap allows institutions to transfer the credit risk, but not the legal ownership, of the reference obligations it may own. Read the rest of this entry »
A total return swap in the fixed-income market is a swap in which one party makes periodic floating-rate payments to a counterparty in exchange for the total return realized on a reference obligation or a basket of reference obligations. A total return payment includes all cash flows that flow from the reference obligations as well as the capital appreciation or depreciation of those reference obligations. When the reference obligation is a bond market index, the swap is referred to as a total return index swap.
The party that agrees to make the floating payments and receive the total return is referred to as the total return receiver; the party that agrees to receive the floating payments and pay the total return is referred to as the total return payer.
Notice that in a total return swap, the total return receiver is exposed to both credit risk and interest-rate risk. For example, the credit risk spread can decline (resulting in a favorable price movement for the reference obligation), but this gain can be offset by a rise in the level of interest rates. Read the rest of this entry »
- Allocation of trades among sister funds When a single investment manager is responsible for a number of funds, the tradingfunds usually is consolidated in a single trading department or trading desk. Maintaining multiple trading desks for separate funds would be expensive and inefficient for the management firm, besides raising questions from a fiduciary perspective. If trading is not pooled, it might be difficult for the investment manager to avoid favoring one fund over another in trading a given stock. If trades for one fund were completed ahead of trades for another fund, the later trading fund would have to bear the market impact of the earlier-trading fund.
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The HHI takes into account the relative size and distribution of the firms in a market and approaches zero when a market consists of a large number of firms of relatively equal size. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases. Markets in which the HHI is between 1,000 and 1,800 points are considered to be moderately concentrated, and those in which the HHI is in excess of 1,800 points are considered to be concentrated. During the 1990s, the HHI for the U.S. Mutual fund industry saw a minor decrease from 396 to 352 based on assets under management,6 indicating that the industry was, and still is, fairly unconcentrated according to this statistical measure.
Another fairly unconcentrated financial industry—domestic commercial banks (including thrifts)—has an HHI of 338, based on deposits of $3.4 trillion as of December 31, 2000. A subset of that universe—domestic money center banks— is much more concentrated, with an HHI of 1,676, based on deposits of $1.5 trillion. In comparison, the U.S. airline carrier industry has an HHI of 1,330, based on 2000 revenues. Read the rest of this entry »
Over the past few years, the merger activity in the mutual fund industry has sharply accelerated. Some of the mergers involved fund companies trying to fill out their line of products. An illustration is the acquisition of Templeton’s management company, which has a strong reputation for international stock funds, by Franklin’s management company, with its heavy emphasis on bond funds. Other mergers involved institutionally oriented securities firms seeking more distribution to retail investors. An illustration is the acquisition of Dean Witter, a retail wire house, by Morgan Stanley, with its institutional client base. Still others involve banks that want to gain a foothold in the mutual fund industry. An illustration is the acquisition of Dreyfus, an investment manager for a broad line of mutual funds, by Mellon National Bank. The following case study discusses several mergers in the mutual fund industry and the early results of the consolidations. Read the rest of this entry »
Sloth is often a function of time. It may be that you don’t have the hours or don’t want to put in the hours necessary to be a good investor. That’s fine. Though there is a minimum amount of work every investor needs to do, you must find the right investing mode given the hours you are willing to expend. Your sloth may result from being in the wrong mode; you’re trying to do it yourself when you really should be relying on a money manager. The three modes, therefore, are:
- Doing it yourself
- Focusing on mutual funds
- Using a money manager
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It may be that as you look at the previous section and clearly identify yourself as a greedy rather than as a realistic investor, your response is, “So what?” You may rationalize this investing behavior as crucial to your success. You are aggressive, confident, and willing to take risks; you made a significant amount of money in the market in the past, and you intend to do so in the future, and the only way you know how to do so is by thinking big and investing like a big-time player.
In fact, big-time investors are big-time precisely because they aren’t greedy. They are highly successful because they understand the way the market works, do their homework, analyze their options carefully, and then make decisions with both short-term and long-term results in mind. The greedy investor, on the other hand, gets into all sorts of financial trouble because his greed is based on an unrealistic view of the market. Read the rest of this entry »
