Is it better to invest in shares directly?

Online trading platforms and exchange traded funds make it easier and cheaper to invest in shares than before. Nevertheless, in some cases it may be better for you to stick with unit trust funds. reports

Investing in the stock market may sound like a smart thing to do; much more trendy than investing in unit trusts.

If you have the money and the expertise to do it, investing directly in shares on the JSE can be very rewarding, but if you are able to invest only small amounts, and/ or you have little time to research where and how to invest, the good advice has always been to choose a multi-asset unit trust fund. This type of fund offers you access to a diversified range of shares and/ or other securities selected by a professional fund manager at a relatively low cost.

However, in recent years, changes brought about by the lower costs of online stockbrokers and the rise of exchange traded funds (ETFs) may have made this traditional advice a little less relevant.

ETFs are listed on the stock exchange, but represent a basket of shares in line with a preselected share, bond or money market index, such as the FTSE/JSE All Share Top 40 Index, so they offer diversification across a range of shares for the price of buying a single share. Now, too, some banks offer pre-selected share portfolios to their online banking customers with smaller amounts to invest.

The JSE says it has seen an increase in the number of individual investors accessing shares and ETFs directly through a stockbroker or investment plan as a result of improved awareness and understanding of markets, the rise of ETFs, the launch of the JSE’s Tax Free Savings Account (TFSA) for ETFs, increased use of online stockbroking platforms, the rise of share incentive schemes, and the growth in the South African middle class.

In just over a year, individuals have opened more than 25 000 tax-free savings accounts with stockbrokers and have invested R250 million in them.

However, there are still some good reasons for certain investors to invest in a unit trust, particularly if they: • Are investing for retirement, • Want greater diversification across the asset classes; When you invest in a unit trust fund, you get the benefit of a professional investment manager managing your money. He or she is backed by a team of analysts who analyse different shares – and/or bonds, cash and listed property if the fund invests these asset classes.

A key strength of active fund managers is that they can select shares and allocate across asset classes based on their perceptions of the opportunities ahead, Lara Warburton, the managing director of financial advisory practice Integral Wealth, says.

You can use a professional stockbroker to choose and manage your share portfolio, with the help of a back-up team, but this will cost you more than operating without support, or having access to only some online research about shares. Ann Mackeurtan, the chief executive of stockbroker Momentum SP Reid Securities, says the relationship You can sell unit trust funds at any time and have the money in your bank account within 48 hours – often less. The unit trust company is obliged to buy the units back from you and may only, under very exceptional circumstances, refuse to pay you out.

Share portfolios can be slightly more difficult to liquidate, Ann Mackeurtan, the chief executive of stockbroker Momentum SP Reid Securities, says. The time it takes to sell the shares depends on the time it takes to find a buyer.

There is also a settlement period on the JSE of three days, which means that, once your trade has been completed, it will be three days before the money is paid to you.

ETFs have to be able to buy the ETFs from you, which gives you liquidity in these listed instruments.

• Are looking for a fund that is managed in a way that reduces exposure to the ups and downs or volatility of the market;

• Want a low-risk, short-term investment, such as a money market fund or an income fund; or

• Want to be sure they can sell their investments quickly when they need to.

Nerina Visser, ETF strategist and adviser at etfSA, an investment platform for ETFs, says there are many factors to consider when choosing how to invest, and you should not consider only costs, but also what other existing investments you have (if any) and your investment needs.

Before you take the plunge into owning shares directly, rather than through a unit trust fund, consider the issues discussed on this page. with a broker is the main reason why some investors prefer share portfolios to ETFs or unit trusts.

In the case of a pre-selected share portfolio offered by the likes of First National Bank, you are relying on the bank’s stockbrokers to select the right shares and you will typically only have exposure to equities.

ETFs typically track an index, so the need for an investment professional’s skills is limited.

When you invest in an ETF that is based on indices made of shares or bonds in line with their market capitalisation, it is a bit like investing using your rear-view mirror: the index weighting is highest in the stocks that have already performed well, but are not always the stocks that will perform well in the future, Warburton says.

Some ETFs track what are known as enhanced indices, designed to harness the returns from a certain type of shares – for example, the Satrix Divi is aimed at harnessing the returns of high dividend-paying shares.