Unit trusts a safe haven for investors
• In the current volatile market, how important is a well-diversified portfolio? asks Andrew Gillingham
Unit trusts remain an attractive investment avenue and the range of portfolios available continues to grow. Tandisizwe Mahlutshana, Executive of Marketing at PPS Investments, says unit trusts are a popular choice for both retail and institutional investors.
“With more than 1,500 portfolios available in the market — up by 164 from 2016 — advisers and investors have an enormous universe to pick from,” Mahlutshana says.
South African interestbearing portfolios, which include money market portfolios, continue to attract a lion’s share of the investment flows and for the year to end March this category received R68bn in net investment inflows relative to R56bn which went into South African multi-asset portfolios over the same period, while equity portfolios added R9.7bn and property R8.6bn.
“This is probably indicative of the investor behaviour in an environment characterised by high levels of uncertainty and volatility, as well as an equity market with stretched valuations,” Mahlutshana says.
Interest-bearing portfolios give investors exposure to bonds and money market securities while multi-asset portfolios offer investors the opportunity to diversify across the asset class universe. Overall, 51% of the total assets under management of local portfolios is held in the multiasset classification; interestbearing portfolios hold 25%.
Paul Hutchinson, sales manager at Investec Asset Management, says the bulk of recent investments have been into money market and flexible fixed-interest funds.
“Investors have become more conservative. There is very little appetitive for equities or other high growth funds,” Hutchinson says.
He says as a whole the stock market’s returns are somewhat masked by the performance of a relative few rand hedge stocks. “As a result of increased tax and lower than inflation annual increases, on average people have less disposable income and this scenario is unlikely to change in the short term,” Hutchinson says.
DIFFERENT STYLES, REGARDLESS OF THE ASSET CLASSES BEING USED, PERFORM DIFFERENTLY IN DIFFERENT MARKET CONDITIONS
At the same time, it remains essential that people provide for their futures and, therefore, where people can, they need to invest as much as they can.
Another important aspect is the increased appetite investors are showing for offshore investments. “As a global business we have a credible global offering and we are seeing flows into our dollar, euro and pound denominated offshore funds.”
Luigi Marinus, senior investment analyst at PPS Investments, says investing is a risky business right now and the market can be quite volatile.
However, one strategy that can be employed to mitigate risk is portfolio diversification.
“The jury may be out about the correlation between risk preference and how it affects the extent to which a portfolio needs to be diversified.
“Many may not agree with the idea of not putting all your eggs in one basket, but we would not advocate putting each egg in its own basket either,” Marinus says.
“For most investors, we would argue that the ideal level of diversification lies in between those two extremes.”
He says in the current economic climate, the question people should be asking is how important is a well-diversified portfolio? Diversification should not be sought by blindly adding many different asset types together. When diversifying a portfolio, a strategic and carefully considered approach needs to be taken.
One of the main goals of diversification is risk mitigation, particularly to safeguard against losses over any period of time.
Different types of assets may perform differently at certain times and, depending on the market direction, could result in a highly diversified portfolio offering more protection on the downside but more muted returns on the upside.
While this may be an inappropriate risk-return tradeoff for a risk-seeking investor who plans to invest for a number of years, it may be more suitable for a more riskaverse investor.
“This frames the case for not only using a low volatility asset class for risk-averse investors, but increasing diversification across more asset classes to provide protection regardless of the market conditions. As the risk profile increases (becomes less risk-averse), the diversification requirement would decrease as well,” Marinus says.
In the multi-manager arena, the ability to use “manager diversification” in addition to diversification within an asset class and across asset classes can be an added advantage.
CHALLENGING
Says Marinus: “The benefit is evidenced when comparing the change in relative fund rankings over discreet time periods. Different styles, regardless of the asset classes being used, perform differently in different market conditions.
“It is challenging to predict when a value or growth strategy may prosper when forecasting market conditions, but it may be reasonable to anticipate which management styles will do well if value prospers or if growth prospers.
“A combination of these different styles, assuming managers remain true to their investment philosophies, would result in a less risky outcome.
“Despite the backdrop of market volatility, we encourage investors to remain calm and to always consult their financial adviser before making any major financial decisions.”