Category Investments

Unit trust funds on the front foot again

13 July 2009 Gareth Stokes
Gareth Stokes, FAnews Online

Gareth Stokes, FAnews Online

The speed and magnitude of the global equity recovery caught everyone by surprise. By 2 June 2009 the MSCI World Index had retraced 45% from its 9 March lows. The MSCI Emerging Markets Index clawed back 68% over a similar period. ‘The recovery has been astounding, to say the least,” said Plexus group chairperson, Dr Prieur du Plessis, as quoted by I-Net Bridge.

Much of the recent strength is due to the return of investors’ risk appetite. Investor sentiment has also improved as the so-called ‘green shoots’ of economic recovery take hold. Du Plessis pointed to the 13.4% (Q2 2009) improvement in the Commodities Research Bureau Index and the 40.8% surge in Brent oil futures as proof. “This [rebound] indicates that global players believe the world economy is turning around and that investors are regaining their appetite for risk,” said Du Plessis. And locally listed shares are following their global peers. The JSE All Share ‘total return index’ climbed 8.7% over the second quarter. Financials were up 12.3%, industrials 14.0% and resources 2.8%.

Should you pour money into unit trusts today?

Under these conditions the unit trust industry has performed commendably. There were still some negative performers in the latest period (five of 29), but Du Plessis notes that the poor performers were all among foreign categories, where performances were severely impacted by the strong rand. Over three months the best performing categories were domestic equity smaller companies (+14.7%) and domestic equity financials (+14.1%). The worst three-month performance – no surprises here – was the foreign fixed interest varied specialist with (-11.6%). Foreign fixed interest bond funds were not far behind with -10.6%.

The question you should be asking is whether it’s time to move your spare cash back into equity unit trusts. According to Du Plessis your decision will hinge on your investment time frame. “If you are a long-term investor with a time horizon of more than five years, now is the time to invest in equity unit trusts,” said Du Plessis. But he warned against committing large sums of funds in a single hit. “As the global economic recovery is still fragile and there may be further downside (or, at best, a sideways trend with volatility) in equity prices over the next few months, investors should adopt a phasing-in strategy,” he said.

The ‘perfect’ investment strategy

The gradual ‘phasing in’ approach to unit trust purchases is nothing new. Jason Zweig, in his special commentary on Benjamin Graham’s The Intelligent Investor, writes about an investment technique called ‘dollar cost averaging.’ The strategy requires that the investor make regular purchases of an investment product that tracks an index. In South Africa investors can implement such a strategy by making regular investments in unit trusts or exchange traded funds.

Does the strategy work? Studies by US-based financial researcher Ibbotson Associates suggest that it does. An investor who put $12 000 in the S & P 500 Index in September 1929 would have had only $7 223 a decade later. In stark contrast, the investor who invested $12 000 in equal monthly instalments of $100 would have been sitting on $15 571 by August 1939. Part of the strategies’ success is its impact on the psyche of the average investor. “Your very refusal to be active and your renunciation of any pretended ability to predict the future can become your most powerful weapons,” said Zweig.

The ‘dollar cost averaging’ process takes place “out of sight and out of mind.” By committing to a behind-the-scenes monthly instalment you can respond to questions about asset allocation, share picking and investment timing with the words, “I don’t know and I don’t care.”

Editor’s thoughts:
Anyone who doubts the efficacy of unit trusts should page through one of the regular industry updates released by the Associations of Savings and Investments South Africa (ASISIA). Fund performances over five and ten years practically mirror (an in some cases exceed) the fund managers’ benchmark. Do you recommend regular contributions to unit trusts as an effective form of long-term saving? Add your comments below, or send them to

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