Unit trusts (also known as “collective investment schemes”) effectively pool the investments of multiple investors and provide them with access to professionally managed investment opportunities that they may otherwise not be able to access alone.
Unit trusts have a number of important features:
- Security – the unit trust is highly regulated. That is not to say that there are no investment risks, but rather that investors are not likely to be defrauded
- Transparency – both charges and underlying portfolio holdings are available to investors
- Performance – fund performance is reported on regularly in the financial media
- Liquidity – investors can access their investment on a daily basis, though one must guard against the temptation of accessing one’s investments to finance current expenditure
- The main advantage of investment in the unit trust is that it is a long-term savings platform
- Accessibility – minimum once-off and monthly debit order amounts are within the financial means of most income earners
- Investment management expertise – unit trusts are managed by professionals who have the time, experience and access to information to best meet the portfolio’s benchmarks
However, it should be noted that for private small investors, even heads of major fund management companies such as Sanlam Investment Management MD Armein Tyer, say that exchange traded funds such as the JSE’s Satrix series are a lower-cost, safe alternative to unit trusts, not yet fully exploited by private South African investors. These funds give exactly the same performance as the JSE, or individual indices of it, such as Financial or Industrials – without the cost of a fund manager.
Paul Hutchinson, head of collective investments at Cadiz Wealth, says the “best unit trust” will be dependent on an investor’s personal circumstances.His pointers also reflect the need to be forward- rather than past-performance focused. “The domestic money market sector was the best supported sector in the unit trust industry for the sixth consecutive quarter to end-June 2009, and money market funds now constitute more than a third of total unit trust industry assets.”
The total size of the industry as per association statistics at 30 June 2009 was R702 billion. The industry currently consists of 884 funds. With the implementation of consumer protection legislation, the Financial Advisory and Intermediary Services Act (FAIS), on 30 September 2004, there has been a marked change in investor behaviour in that most of the asset flows have been into money market and longer duration fixed interest funds and away from pure equity funds.
Hutchinson adds: “While this conservative strategy has served investors well over the past year, this investment in cash does introduce a new risk in a decreasing interest rate environment.
Also appealing to the conservative investor, is a series of unit trusts known as guaranteed funds or real-return funds, which aim to guarantee a return of, say, 5% over inflation. Asset managers such as Old Mutual Investment Group specialise in such funds, though all major asset houses offer them. With these, you take greater risk through a higher weighting in equities, but will equally be denied the full return in a bull run.
The major asset management houses – Old Mutual, Sanlam, Momentum, Stanlib and Coronation – each offer an exhaustive list of mandates which should cater to all investors’ needs and risk profiles.
No easy decisions
Once you have made the decision to invest in, say, equities over cash, bonds or property, the choice of fund manager becomes complex. There is a debate among fund managers regarding a passive versus active approach to fund management.
All fund managers aim to beat the equity market, but logic dictates they cannot all do so (as the index is an average). In fact, according to Andrew Newell, head of new business at Cannon Asset Management, “research shows that globally, over investment periods of five, 10 or even 20 years, about 75% of investors fail in their quest to beat the equity market.
“By extension, only a modest 25% of active investment managers are successful. This result suggests that for most investors, a passive investment is the correct decision.”
An active management philosophy, as shown in the “balanced mandate” fund, has become more popular over the past six months of equity volatility. Its major advantage is the fund manager’s ability to switch between asset classes as economic fundamentals change.
Candice Paine, head of retail at Sanlam Investment Management, offers this advice for investors who opt for active investment: “Consistent performance is a difficult target and requires a fund manager to focus on the risk of the bets that he is taking and the contribution of this risk to overall portfolio volatility.
“Flexible mandates are ones which allow material changes in asset allocation depending on the view of the fund manager, so in the most extreme cases these funds may invest 100% in equities or 100% in cash,” says Paine.
“In practice this usually doesn’t happen for two reasons; a fund manager’s conviction isn’t usually that polarised, and it is an expensive exercise to reposition big funds. The benefit of an asset allocation fund is that you get diversification across asset classes which can limit fund volatility in the short-term.”