Weekly Thoughts 19 October 2018

The thought came upon me the other day to write a bit of a technical and learning newsletter, on a couple of issues of how unit trust funds are run.

Every fund will have a minimum of about 3% in cash in it, possibly as much as 5%. This means that if you have your money in Allan Gray’s equity fund, for example, or Marriott’s Dividend Growth fund, these funds won’t have 100% in shares on the stock market. They must have a bit of cash in them. This is because if you want some money out of a unit trust fund, the management company has to be able to give it to you within two or three days, whereas if you hold the shares directly on the stock market, you, or a stock broker, has to find a buyer first in order to dispose of your shares and get your cash out.

Furthermore, a fund manager of a unit trust fund will usually be paying your withdrawal out of this cash portion held, and then might top up the cash portion again with the next person’s deposit, meaning they have not had to trade in the fund at all. This could go on for many days or weeks and can be a good thing. They don’t have to sell when they don’t want to, and then sometimes they might also be battling to find shares with value to buy, hence if inflows are able to top up the cash portion, they don’t have to compromise the fund as a whole.

If the cash portion gets too low, they will sell off some shares to bring it back up again. They also have to be careful not to dilute the fund, meaning begin to hold more cash than they should be.

I regularly enjoy digging into the technicalities of the management of investments. Often learnt though, through direct discussions with asset managers.