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Unit trusts: investment timeframe key

09 April 2014 John Duncan, Momentum Asset Management

In 2000, the collective investments industry had only R117 billion assets under management, with R44 billion in equity funds, R6 billion in asset mix funds and R33 billion in money market funds. Industry assets have since ballooned to R1.5 trillion, with R300 billion in equity funds, R630 billion in asset mix funds and R250 billion in money market funds. This is despite the temporary setback of the most severe global downturn in 2008/2009 since the great depression.

The subsequent, gradual and stuttering global recovery has ensured continued abundant liquidity underpinning global equity markets. Emerging market assets have benefitted disproportionately, with the last five years having generated good returns for the local unit trust industry as a result. Adding to this appeal is the fact that unit trusts also cater for varying economic scenarios and investor risk tolerance levels, making them an investment vehicle particularly well suited to weathering the current uncertainty in global markets.
 
With the market offering a diverse range of more than 1 000 unit trusts, short, medium and long-term investment goals can be accommodated. Some funds provide exposure to low-risk money market and debt securities and others to riskier equity instruments and/or offshore securities with varying combinations of asset classes. "This means that there is a wide spectrum of funds available in terms of risk and return attributes, which can be matched to the risk profile and investment horizon of different savers,” says John Duncan, head of product management and technical marketing at Momentum Asset Management.
 
The passive vs. actively managed unit trust debate also, essentially, comes down to investment time frame, as well as considerations like length of cycle (active management can be more effective in a volatile market environment), asset class or index and cost. Balancing the after-cost return of an investment may, as a result, be better addressed by combining higher-priced active manager skills (benchmark and asset class choice) with a passive investment product that index tracks at a lower fee.
 
Another consideration is the hunt for yield and growth markets that is currently being witnessed in the world economy, which has seen investors becoming more adventurous with their capital. With funds now being able to invest 25% offshore, African economies (which are growing faster than those of the rest of the world) are offering strong earnings growth opportunities. Investors willing to see out the various economic and infrastructure development themes prevalent across the continent are likely to enjoy positive results over time.
 
Cash-plus and hybrid fixed-interest funds, due to the last two to three years’ record low interest rate environment (globally and locally), have also enjoyed significant interest as a result of the current need for diversification and yield. These strategies include higher exposures to term and credit risk, as well as property and/or offshore assets, and have generated sound incremental returns. Bond and hybrid fixed-interest funds have, however, delivered disappointing returns over the last year with the bond and property market sell-off. These funds continue to offer the potential for measured returns above cash with local equity markets extended and concerns around the impact of reduced global liquidity.
 
Investment strategy and asset class mix, however, should always be decided upon with the client’s savings objectives in mind and incorporate inflationary targets over specific investment periods. "These are key considerations when deciding a unit trust. It’s all about the end goal, time frame and keeping up with inflation,” concludes Duncan.

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