Af­ford­able and transparen­t

Unit trusts are a key part of any port­fo­lio, writes

Financial Mail - Investors Monthly - - Feature: Unit Trusts - Pe­dro van Gaalen

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

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