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 ).