Affordable and transparent
Unit trusts are a key part of any portfolio, writes
Unit trusts are considered a simple, convenient and affordable collective investment through which retail investors can gain exposure to a range of local and foreign assets, including equities, bonds, listed property, gold or money markets.
“Local unit trust investors are spoilt for choice in terms of the investment options available, which are also more affordable than many other types of investments,” says Galileo Capital’s Warren Ingram. “Unit trusts also offer investors fraud protection as these funds are very transparent and highly regulated.”
With a minimum lump sum of R1,000 or R300 per month, investors can cost-effectively access a broad universe of passive investment options. This is an important component of any well-balanced portfolio, says Iain Anderson, head of investments at Sygnia.
“Unit trusts remain at the forefront of fee disclosure in SA. If investors do their research, they may find that certain unit trust options offer better cost savings than others, and we believe cost is one of the most important factors to consider when constructing an investment strategy.”
Unit trusts are a suitable means to construct a passive core investment strategy cheaply. Anderson says that should account for at least 60% of an investor’s portfolio.
“Given the market’s broad and diverse offering, investors could conceivably hold their entire passive investment component in unit trusts, provided they ensured a suitable asset allocation and risk profile that aligns with their individualised long-term investment goal.”
Anderson says unit trust asset allocations should be guided by an investor’s total portfolio exposure to avoid issues like concentration risk.
“It is key to understand how your overall portfolio will look when you blend everything together. Ensuring exposure to a spread of sectors within both domestic and international markets is a prudent approach to unit trust asset allocations and portfolio construction.”
Investors should also aim to take full advantage of the increased offshore allowances permitted for Regulation 28compliant unit trust funds.
“Amendments to the Pension Funds Act lifted limits on direct offshore exposure outside of Africa from 25% to 30%, and from 5% to 10% within Africa, excluding SA, which was a significant increase. In the past, Regulation 28 requirements were a constraint on our modelling, but the new limits align precisely with what our modelling suggests in terms of offshore allocations.”
There are already unit trusts that can go up to 30% in terms of offshore exposure, and there are also rand-based unit trusts that can boost offshore exposure without requiring Reserve Bank approvals.
The unit trust sector also finds itself in a renewed period of innovation as mobile platform technologies and backend system advancements are creating operational and cost efficiencies, which are facilitating broader inclusivity.
“Many of the big unit trust administrators are working hard to enable investors to open unit trust accounts and transact via their mobile devices in a completely paperless environment. This makes them more accessible and affordable, which is helping to democratise unit trusts and give more South Africans access to effective passive investments,” says Ingram.
Anderson adds that mobile platform plays also reduce costs by allowing investors to purchase these investments directly, without the need for an intermediary.
“While going direct offers many cost and administrative benefits, investors must know what to invest in. Thankfully, technology is also broadening access to information, and there is more disruption on the horizon that will benefit investors, which we welcome.”
When more fund managers realise their digital transformation objectives, there will be significant scope for unit trust providers to give investors with smaller amounts of money access to these investments.
“The efficiencies that technology creates will hopefully serve to reduce administrative fees and create the economies of scale needed to lower the minimums that fund managers apply. This is critical for both the industry and the country because most South Africans cannot afford to invest R1,000 lump sums or commit R300 a month to these types of investments. As such, the industry needs to develop cost-effective ways to cater to amounts as low as R50 if it hopes to grow the market and boost the financial prosperity of more South Africans by broadening financial inclusivity,” says Ingram.
“Ensuring exposure to a spread of sectors in domestic and international markets is a prudent approach to unit trust asset allocations
Warren Ingram … financial inclusivity
Iain Anderson … better cost savings