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Unit Trusts Insights

16 November 2023 Andriette Theron, Head of Research at PPS Investments

1. What factors should investors consider when including unit trusts in their investment strategy in 2024?

The most important factor to consider is the blend of unit trusts included in the strategy. The quality of a multi-managed solution is very much dependent on the quality of its components, which are the underlying managers. It is important that the mix of unit trusts offers sufficient diversification from an investment approach and style perspective. This will ensure that the solution harnesses different drivers of returns and protects against different types of risk so that it is not positioned to only do well in a very specific environment. Secondly, financial markets currently provide a much broader opportunity set, within asset classes and with viable asset class options outside of equities, which will give managers who are able to take advantage of these opportunities through active security selection and asset allocation a competitive advantage.

1. What is driving the popularity of multi-asset funds amid global economic volatility?

The main benefit of a multi-asset portfolio is its broader investable universe, which allows for enhanced diversification benefits. A further benefit is the ability to adjust the risk exposure depending on market conditions, by altering the mix of growth assets compared to income-generating assets.

Depending on what the objective of the solution is, such as targeting an inflation objective or aiming to outperform an investable benchmark, we find that combining both specialist managers (where we drive the asset allocation decision), as well as multi-asset managers (who follow their own asset allocation approach), leads to a robust multi-asset solution.

2. What factors are driving the rise in AUM in unit trusts?

Ease and comfort - knowing that you have a team of investment professionals that is focused on identifying and blending securities, asset classes, and/or manager strategies. Unit trusts ultimately provide investors with easy access to financial markets in a well-diversified solution. In a multi-managed unit trust, there is no need for the investor to change the underlying manager exposures as market conditions change as the solution is specifically designed to mitigate manager style risk.

3. If investors invest across a basket of unit trusts, how should they select products to mitigate concentration risk?

We typically define concentration risk as the risk of being overly exposed to a single view, whether that is driven from the bottom-up on an instrument level or from the top-down on positioning the fund for binary macro-outcomes. Harnessing specialist manager skills and blending managers with different but complimentary investment approaches reduce undue risk and deliver a strong relative performance.
For example, our inflation-targeting funds are made up of two equal components. One-half of the fund uses specialist managers to express our asset allocation view in achieving the inflation objective where the underlying managers are mandated to outperform their respective asset class indices. The other half of the fund uses a combination of multi-asset managers who make independent asset allocation decisions. The goal is to pair managers that differ enough to reduce the overall volatility, while still delivering a return greater than the peer group average over time.

4. How can local investors increase their offshore investment exposure via unit trusts?

Local investors can increase their offshore exposure in various ways, depending on their financial need. They can gain direct offshore exposure by investing in global portfolios that either invest across global asset classes (The PPS Global Balanced fund) or invest in a portfolio that provides access to a specific asset class (The PPS Global Equity Fund). Investors can also add to their offshore exposure by investing in local multi-asset funds where the underlying manager has the discretion to adjust the fund's overall offshore exposure and mix of exposure to global asset classes as they see fit, depending on the market environment.

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