Unit trusts win back lost deposits

Banks and building societies are having to meet the growing demand of savers for equity investment. Claire Burston assesses their performance

BANKS and building societies have been setting themselves up as providers of unit trusts in an attempt to stem the flow of savers from traditional deposit accounts to the more risky, but potentially more rewarding world of equity investment.

The public's gentle creep towards equity investment became evident in the mid-1980s, but the introduction of the tax-free PEP umbrella in 1987 and the UK's low-interest-rate environment have made unit trusts a much more attractive proposition for savers.

In 1993, sales of unit trusts by building societies surpassed the growth of building society deposits for the first time, and although societies have regained some ground on deposits because of recent rises in interest rates, they are taking no chances.

The Woolwich, Leeds, Halifax, National & Provincial and Britannia have all established themselves in the unit trust market over the past five years.

During the past few months both Nationwide and Alliance & Leicester have announced they will be entering the market early next year. And a few weeks ago, Abbey National was granted authorisation to establish a unit trust operation.

Penetration of unit trusts in the UK has remained small, with the vast majority of unit-holders aged 55 and over, and in the AB social category. Banks and building societies are aiming to change all that by targeting their efforts towards a younger, less exclusive audience.

Woolwich has made a particular success of it, operating a card-based instant dealing service in all its branches. It launched Woolwich Unit Trust Managers (WUTM) with just one fund in 1990, and now has 75,000 unit- holders with funds under management of around £330m.

More than 70 per cent of its investors are new to unit trust investment, with around half being Cls and C2s, investing an average of £4,500. More than 90 per cent use a PEP.

The tax advantages of a PEP have proved a successful way of pulling in the less experienced investor, and building societies in particular are steadily increasing their share of this market. The societies accounted for 13 per cent of sales last year, compared with 9 per cent in 1991, while banks increased their market share from 19 per cent in 1991 to 20 per cent in 1994.

Nearly 70,000 of WUTM's unit-holders are regular savers, and David Holcroft, managing director of WUTM, believes this type of investment will become increasingly popular, particularly as the PEP becomes a more acceptable way of repaying a mortgage. He expects between 30 and 50 per cent of regular savings unit trust business to be linked to mortgages over the next year.

"The danger was that we would just be transferring money from deposit accounts. In fact, although 80 per cent of our unit trust holders are Woolwich savers, some 65 per cent of money is new to the organisation," he said.

Mr Holcroft believes the building society's success in attracting new investors stems from its simple approach.

"We are trying to simplify unit trusts," he said. "That, combined with our performance and the reassurance of our name, has meant that our customer base has been spread among a wider range of social groupings than would have previously been the case."

The key to banks' and building societies' success has been their extensive branch networks and strong brand names.

David Chapman, unit trust product development manager at Barclays, said: "We are very approachable. If you want information about investing in our unit trusts, you can pop into any local Barclays branch and talk to somebody there who can come up with a complete investment plan to suit your needs.

"With most unit trust companies you've only got one port of call, which is an independent financial adviser."