PICK AND CHOOSE
Investors are faced with a huge number of unit trusts to choose from and should select carefully
It is unclear what to make of the ever-growing number of unit trusts available on the market. By the end of December last year, the total had ballooned to 1,626. Five years before there were 967. And it should be no surprise that total assets under management also grew significantly — by 83%, to be exact, to reach R2.25 trillion.
With so many different funds to chose from, what is an investor or adviser to do?
“The number of funds is quite concerning, but one must also understand which are the funds that are increasing,” says Leigh Köhler, head of research at Glacier by Sanlam.
“The large growth has been in the multimanager area. Big companies, funds of funds or multimanagers are launching solution funds to provide for a specific groups of clients.
“Regulation 28 drove the balanced fund industry because it provides a good solution that normally encapsulates the best across asset classes.”
Regulation 28 previously limited funds to an exposure of only 25% to international assets and 5% into the rest of Africa. These limits were increased in the 2018 budget to 30% and 10% respectively.
The growth in the popularity of balanced funds is evident in the numbers published by the Association for Savings & Investment SA. Between the end of 2012 and 2017 the number of local balanced funds grew by 87% and equity funds by 52%. Interest-bearing funds declined by 9%.
Balanced funds rose to 49% of total assets under management, from 34% in 2012.
Equity funds have remained fairly constant at around 21%, but interest-bearing funds slipped from 40% to 26%.
Köhler says the growth in the number of balanced funds could have been driven purely by demand and the need for asset managers to remain sustainable. This is particularly true of the number of boutique fund managers that have sprung up in the wake of shakeups at the likes of Coronation, Allan Gray and RMB. These teams tend to have skills in managing particular assets, but gravitate to multi-asset funds as that is where the demand lies.
Jason Swartz, head of portfolio solutions at Satrix, shares Köhler’s concern about the increased difficulty presented by the greater number of funds.
He says it affects both fund managers who may tend to introduce new funds to bulk up their book and investors who need to find a solution that meets their investment goals.
“What investors need to think about is whether a fund is a legitimate building block or a legitimate fund offering with a tried-and-tested investment approach. It’s a real challenge, specifically for investors who don’t have access to advisers or consultants who can do research and pick the best options for them.”
He suggests that people should do what research they can into the performance of the funds and their managers. They should, if possible, try to get a better understanding of the fund managers’ philosophy and find out whether they operate according to a proven approach and how that philosophy is embedded in the portfolio. “We don’t have expertise in manager research, but often our clients ask our view about how certain managers stack up relative to index or tracker funds,” he says. “And it’s a challenge, because performance is the easiest thing to grab onto. But you need to understand the process, capacity, costs, transparency and diversification of these funds.”
This is an area Köhler is well acquainted with in his position as head of research for Glacier by Sanlam. One of the products of his research is a biannual publication of local and global funds and asset managers. It tracks their performance and returns, by asset class and sector.
“The aim is to give financial advisers peace of mind when selecting unit trust funds and asset managers,” he says.
“We look to understand whether the manager has a clear, sound philosophy, from idea generation to portfolio construction, and [whether this is] consistent and understandable. We look closely at investment teams, qualifications and the viability of the business.”
Köhler acknowledges that he is privileged to be able to drill down to such specifics. In a market awash with more than 1,600 funds, those insights represent significant market intelligence.
Picture: 123RF — OLEGDUDKO
Leigh Köhler … market intelligence