Unit Trusts compared with shares

Unit trusts are open-ended; the fund is equitably divided into units which vary in price in direct proportion to the variation in value of the fund's net asset value (NAV). Each time money is invested new units are created to match the prevailing unit buying price; each time units are redeemed the assets sold match the prevailing unit selling price.

This is different to a shareholding in that the value of the units always reflects the underlying asset base, there is no "overpricing" to reflect rarity or excess demand, nor is there "underpricing" with a slump in share price below fair value if a stock is unpopular or excess shares are for sale.

Whatever the supply or demand for units they remain a direct reflection of the underlying assets.

Another difference is that there are no physical shares for investors to hold. Instead the number of units held is recorded on the register of investors.

Pricing of units and Bid-Offer Spread

Every week Optech computes the value of the trust, divides it by the number of units in issue, and produces a bid and offer price based on that calculation. The trust makes a profit from the difference between the price they will sell units for (offer price), and the price it will pay to buy units back units from investors (bid price). This difference is known as the bid-offer spread. Note this is the trust itself making a profit, not the fund manager, and so the bid-offer spread contributes to the bottom line profits of investors.

The Optech spread is currently 15%. In other words if the underlying Net Asset Value of the trust is 1 million isk per unit you would pay 1.075 mil to buy a unit, and would be able to sell at 0.925 mil.

There are two reasons for the Bid-Offer Spread. Firstly it is time consuming to undertake the administration involved in buying and selling units and the spread compensates existing investors for this (basically this is time where we could be trading and generating profits). Secondly, the spread is a disincentive to investors buying and selling their holdings very frequently. If investors are constantly switching money in and out of the fund it becomes more difficult to make planned business investments. We would advise that you do not view OPTUT as a short term an investment (i.e. in this context less than a month) or you will very likely lose money on the resale of units.