18 FEATURE UNIT TRUSTS 31 May 2017
ELIZE BOTHA Managing Director: Old Mutual Unit Trusts
Unit trust selection in South Africa
Unit trusts have grown increasingly popular amongst local retail and institutional investors alike, driving the registration of 193 more unit trusts in South Africa last year alone, according to the Association for Savings and Investment South Africa( ASISA)’ s collective investment scheme statistics to the end of 2016. In addition, ASISA’ s statistics also showed that the number of unit trust funds in the country has more than doubled over the past ten years.
Unit trusts cover a wide investment spectrum, from money market funds to equity and specialist equity funds, such as funds investing in predominantly gold mining companies for example. While this world of choice may seem overwhelming when identifying the funds most suited to investors’ needs, the fundamental classification and selection process have not changed and it should not change the way investors choose funds.
An investor’ s objective should always be the starting point before looking at the multitude of options available. The aim should always be to marry the investment objective of the investor with funds that are designed to deliver a similar objective.
There tends to be a correlation between an assets’ potential to deliver good inflation beating returns over the long term versus its volatility in the short term. Globally, equities have and are expected to continue to deliver better long term returns than cash and bonds. The reason for this pay off lies in the fact that in general equities comes with more risk of capital loss than investing in government bonds or holding cash. In time, equities as an asset class do manage to deliver higher returns to compensate the investor for the higher level of risk. The above graph shows the equity markets’ performance since 1975 in South Africa.
Over the last century, we’ ve seen major developments( such as the invention of cars and the advent of the worldwide web), but also unprecedented political and economic upheaval – world wars; oppression and civil revolt. Throughout this period, according to a study by Credit Suisse Group AG and the London Business School( Bloomberg), South Africa has delivered the highest average returns for investors in the equity market.
Making sense of unit trust categories To select the best-suited unit trusts, it is important to have an understanding of the fund classification structure, which groups similar types of funds together to assist investors with fund selection and facilitate better comparison and analysis. Two of the major geographic classifications are South African funds and Global funds. To qualify as a South African fund, a fund must have invested a minimum of 70 % of its assets in South African financial markets, while Global funds are required to hold at least 80 % of their assets in non-SA financial markets.
Further under these two banners, there are categories for each. For instance, a South African general equity fund must invest at least 80 % of its assets in equities.
High Equity and Flexible funds are both, in terms of classification, multi-asset portfolios. This means they may invest in any allowable asset classes, not only equity, but also for example cash bonds and listed property. A South African Multi- Asset Flexible fund has complete discretion in allocating assets between the various asset classes( only subject to a minimum of 70 % allocation to local assets). A SA High Equity fund has further restrictions and may not have more than 75 % exposure to equities or more than 25 % exposure to listed property. SA High Equity funds / mandates are typically found
in retirement fund savings, due to the restrictions mentioned.
Flexible funds range from very aggressive to very conservative, depending on the fund’ s mandate and objectives. Unlike the other two categories discussed, there is not really a generic flexible fund. The investor would need to evaluate the mandate of the fund in isolation, to gain a better understanding of the fund and how it differs from a General Equity or High Equity fund.
South Africa’ s top unit trusts Currently, South African Multi-Asset High Equity funds are the most popular category( by size) as these portfolios still offer the ability for good long-term returns, but typically display lower levels of volatility since the equity exposure is restricted. Retirement fund regulation prescribes maximum exposures and most High Equity funds aim to comply with these to be eligible as a( stand-alone) solution to retirement fund investors. Longer-term investors outside of retirement funds who are prepared to accept higher levels of volatility would consider General Equity funds and( aggressive) Flexible funds.
Invest for the long term Generally speaking, all three types of funds are suited only for longerterm investors.
Source: Old Mutual Investment Group and INet: 06-04-2017
Stick to your plan and ignore short-term noise In general, unit trusts are longterm investments. Unit trusts have become the preferred way for most South Africans to invest due to their flexibility, daily liquidity, low minimum investment amounts and high levels of transparency. It also assists with the concentration risk that you may face with direct equity market investments. While there is an ever-growing list of funds to choose from and we can never predict the future, one thing we are certain of is that through turbulent times and stock market volatility, staying calm beats reacting impulsively.
IMPORTANT INFORMATION Old Mutual Unit Trust Managers( RF)( Pty) Ltd is a registered manager in terms of the Collective Investment Schemes Control Act 45 of 2002. The fund fees and costs that we charge for managing your investment is accessible on the relevant fund ' s minimum disclosure document( MDD) or table of fees and charges, both available on our public website, or from our contact centre. Old Mutual is a member of the Association of Savings & Investment South Africa( ASISA).