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Navigating the choice of unit trusts

17 August 2012 Andrew Kemp, Head of Investment Product at Liberty Corporate

Unit trusts remain the preferred form of investment for most investors in South Africa, yet with more than 900 available; the reality is that while the investment vehicle remains the same, the type of investment being provided differs hugely.

According to Andrew Kemp, Head of Investment Product at Liberty Corporate, it is crucial that investors understand what type of investment they require. “Unit trusts can vary from defensive strategies such as money market funds that invest in cash, through to more aggressive strategies that invest primarily in equities.” It is vital to understand what an investor’s investment objective and time horizon is. Generally the shorter the time horizon the more conservative the investment should be and the higher the investment objective the more aggressive.

“In addition, investors must also choose between single funds that are managed by asset managers, to multi-manager funds that combine a range of unit trusts into one platform. When choosing a single managed fund it is critical to research the investment house to ensure one understands the investment philosophy and that it matches one’s own investment needs.”

“Multi-manager funds can be a good way to diversify the risk that one is taking on, as the investment is spread across multiple asset managers. However, it is also crucial to understand how the multi-manager puts the funds together and how they make their investment decisions to avoid any unpleasant surprises further down the line.”

He says investors often make the mistake of believing that if the asset management firm is well known, it is a safer investment. “Asset managers have very different investment styles. Some take a long term investment view, with the result that the fund may underperform at times and outperform at others, while others are much more market congnisant. So while they still deliver outperformance, the general investment pattern is much more aligned to market movements. It is crucial to know what type of manager is managing your unit trust as it may have an impact on your behavior.

For example, managers with long term views may deliver superior performance over time, but if the investor cannot tolerate shorter term underperformance as compared to the market, he may very well sell his unit trust at an inappropriate time.

“Another common mistake made by investors when choosing which unit trust to invest in, is to look solely at performance figures. Investor choice is often driven by past performance, so investors identify which funds have performed well recently and base their investment decision on that.”

“However, it is important to understand what one is buying – if the fund has performed well recently that means it is now holding equities that are more expensive. Performance is a good indicator but one needs to look at the long term performance not the short, in order to make a qualified investment decision.”

Kemp says that for those investors who do not want to spend time researching various investment houses; it is safer to invest in more than one established asset manager. “The best advice for investors, regardless of whether they are investing for short or long-term needs, is to diversify their capital across investment houses with different investing styles.”

“Unit trusts are flexible, liquid investments but with investment styles varying greatly between houses, investors still need to do their research before choosing where to invest to ensure that the style of the asset manager matches one’s own investment requirements,” concludes Kemp.

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