Guide to navigating unit trusts

COMPLEX UNIVERSE: GOOD ADVICE A MUST FOR BEGINNERS

Young and old South Africans are taking a second look at the exciting world of unit trusts, but are really bewildered by the complexity of choice.

For many investors – young, old, inexperienced or experienced, South Africa’s unit trust industry provides a great vehicle for investment. That said, for many investors the industry remains completely impenetrable.

There are now 1 520 unit trusts in the country, ranging from safe, low-growth money market funds, to riskier-but-inflation-beating equity funds.

So how to choose?

John Green, global head: client group at Investec Asset Management, says “the first place to start is to understand your own time horizon”.

Understand that more return comes with more risk, but that this is mitigated with time. For instance the Investec General Equity fund has returned an average of 16% every year (after fees) over the last 21 years (this was recently acknowledged at the Raging Bull awards).

However, investors in the fund had to endure 17% to 18% losses between October 2008 and October 2009.

As a rule of thumb:

Time horizon of 7 to 10 years, pick from the general equity category; or

Time horizon of 5 to 7 years – pick from the high-equity, multi-asset category; or

Time horizon of 3 to 5 years – pick from low-equity, multi-asset category.

“While 51% of South Africa’s R2.1 billion in assets under management (AUM) is invested in multi-asset funds, my advice for long-term savers would be a general equity fund where your benchmark is the whole of the JSE,” says Leon Campher, head of the Association for Savings and Investment.

Which collective investment scheme (CIS) manager you invest with and which funds you select is a tougher choice.

“You don’t want to be switching between managers or funds halfway through a time period,” Green adds.

Investors often pull out of a fund when it is performing badly and into a fund when it is at its peak, magnifying losses. Ideally an investor should pick two or even three managers to diversify risk. Look for managers that have been around and have a demonstrated track record. When it comes to selecting funds, the process is equally systematic. First select the fund category (for instance equity, real estate, multi asset). Assuming you have selected general equity, within that category there are about 250 funds. Look for those that have a track record of five to ten years, says Green. Size could be used to filter your choices further.

However the average investor could narrow the list by looking for funds with over R5 billion in AUM, he says.

Then take that universe and make your selection based on personal preference and investment philosophy.

Fees

“The only thing that an investor can really control is the cost,” says Abri du Plessis, CEO of Gryphon Asset Management.

“Choose the lower cost funds or keep your fees as low as possible. Scale is important in this game, but the average manager still charges too much.”

Financial advisors

For investors who are traversing this complex world of 1 520 unit trusts an “obvious place to begin is with a financial advisor,” says Elize Botha, MD of Old Mutual Unit Trusts.

You don’t want to be switching between managers or funds