Not a bad place...

Net inflows into unit trusts totalled R40.6bn in 2004, proving they remain a popular investment option. This increase has come solely from inflows into local unit trusts.

"Within local unit trusts, fixed-interest funds continued to attract the lion's share of assets, while there was a marked pick up in assets flowing into local equity unit trusts, increasing from less than R1bn in the first quarter of 2004 to more than R2bn in the fourth quarter," says Debbie Prinsloo, a retail development specialist at Investment Solutions.

Inflows into asset-allocation unit trusts as a percentage of total inflows into local funds also increased substantially from 2003. The main beneficiaries of these inflows were the targeted and absolute-return unit trusts, and funds in the Flexible Property category, with the two categories increasing assets 76% and 59% respectively during 2004.

Prinsloo says targeted and absolute-return unit trusts have proved popular with investors as they offer the opportunity to earn absolute (ie positive) and/or real (ie above-inflation) returns, while protecting against downside risk (ie negative returns).

"There is a cost associated with this, and they are likely to underperform traditional balanced unit trusts in strong equity markets and over the longer term. This was the case for the 12 months ending December 2004, when their average return was 13.8%, compared with the Prudential Medium Equity category average of 28.5%," she says.

"Property unit trusts proved popular as investor confidence in the local property market soared, evidenced by the strong demand for property shares, which increased sharply throughout 2004. The average return from unit trusts in the Flexible Property category was 34.2% for the 12 months ending December 2004," says Prinsloo.

The best-performing category was Domestic Equity Smaller Companies, which returned 58% for the year. Inflows into smaller company unit trusts picked up in 2004 after the sector experienced net outflows in 2003.

She further says the positive economic environment and strong returns from local asset classes in 2004 increased investor confidence, and unit trusts continued to be the favoured investment choice.

"They are a convenient and affordable way of investing in financial markets, and are also highly liquid and transparent."

Investors can choose to invest a lump sum, which means the entire investment immediately benefits from the growth and income potential of the chosen unit trust.

Alternatively, a regular amount can be invested each month, which is an easily affordable way of building up capital. A regular monthly investment gives investors the benefit of Rand-cost averaging -- when the unit price falls, the monthly investment buys more units, and fewer units when the price rises.

Unit trusts are highly liquid as the management company guarantees to buy back units and pay their value in cash. This is different from investing in shares, where there is no guarantee of a buyer nor of the price a share will attain.

Unit trusts offer investors a high level of transparency.

A CISCA stipulation is that all management companies must disclose certain information to investors before transacting with them. Information that must be supplied includes all charges, how the unit price is calculated, the objective and risk of the unit trust, when income is declared, the amount of income declared in the previous financial year, as well as full contact details of the management company and the trustee or custodian.

Unit trust performance tables are regularly published in most financial publications and full details of the underlying holdings in each unit trust are disclosed quarterly. Unit prices are calculated daily and quoted daily in the national press.

Investors can calculate the value of their investment at any time by multiplying the number of units they own by the unit price of the relevant unit trust.

Unit trusts are managed by highly qualified investment managers, specialists, whose full-time job is to make investment decisions. Few people have the necessary time, skills or experience to actively manage their investments and research the best ways of making the most of their money on a day-to-day basis.

By investing in unit trusts, investors gain access to expert investment management by trained professionals with proven track records.

"In addition to the investment merits of unit trusts, the current positive economic environment should continue to attract assets into funds as investors scramble for a share of the gains and hope for returns similar to those of 2004," says Prinsloo.