Category Investments

Unit trusts remain a popular investment vehicle

22 May 2014 John Duncan, Momentum Asset Management
John Duncan, head of technical marketing at Momentum Asset Management.

John Duncan, head of technical marketing at Momentum Asset Management.

Unit trusts have become the preferred investment vehicle in South Africa. There are now over one thousand unit trust funds to choose from and approximately R1.5-trillion assets invested in these funds. John Duncan, head of technical marketing at Momentum Asset Management, examines this trend.

"Unit trusts are a powerful investment tool. They allow investors to access any underlying exposure that interests them, which makes them an attractive investment option, be it traditional property, shares on the JSE, international equities, bonds - or a mix of them, which is currently the most popular trend in unit trust investing - commonly known as a multi-asset fund,” says Duncan. More exotic alternatives include African equities, high yield credit, commodities and inflation linked bonds.
Typically, multi-asset funds hold a mix of equities, bonds, cash, property and off-shore assets. Investors will choose a multi-asset fund by assessing their objectives. These include shorter, medium or long-term investment periods; risk appetite; and the combination of income and growth required.
There are multi-asset funds that target growth, measured in inflation +3%, + 4% or +5%. It goes without saying that the higher the target, the more risk is required in the funds. This means that a multi-asset fund with a CPI+5% return target will have more equity (up to 75%) and offer more growth opportunities but less income. Drawdowns can however be relatively significant over the short to medium term requiring a more lengthy investment term, at least five years preferably.

Conversely a multi asset fund with a CPI+3% target may be limited to a maximum of 40% equities. It will consequently offer less growth opportunities but higher income. The investment term could be shorter but it is still best to leave your savings intact to benefit from compounding.
Duncan says investors should aim to grow their assets above inflation to maintain and grow their real capital. All but the most risk tolerant or risk averse investors are well served in choosing a multi-asset fund with a return target somewhere between CPI+3% and CPI +5%. Pre-retirement investors need to grow their real capital to fund their retirement income while a retiree spending 4% of his capital annually will need to attain growth of CPI +4% to stop drawing down on the real value of his capital.

Making a case for fixed income securities

Naturally, different assets offer different returns and risk profiles. Cash is a good starting point, but to make higher returns, bonds should be added, and accelerated growth comes from equity. Bonds can be expected give investors 1% or 2% above inflation over time, whereas equities can give 6% or 7% above inflation over time. That’s why when investors are looking for growth they turn towards equity.
"Psychologically, some people tend to shy away from volatility, but in fact they should be taking more risk,” advises Duncan; adding that this is where a good financial adviser (FA) is critical. "An FA can offer an objective view of the investor’s situation and can propose sound advice on how to achieve one’s investment goals. With so many different unit trusts – each with its own subtleties – investing is at best a complex environment.”
Return drivers are important factors when it comes to unit trust returns. Return drivers include inflation, interest rates and changes in expectations of these. Profit margins of companies, GDP growth, state of the economy, both locally and globally all affect the performance of bonds, property and equities. Return drivers also introduce risk into portfolios and it is important that investors have some understanding how these can impact their possible returns
Duncan says unit trusts, especially those exclusively invested in equities have done very well for investors with equity markets rising strongly locally and globally over the last five years. Equities are however more expensive now, and market corrections are possible if not probable in coming quarters. Multi-asset funds offer growth through some equity exposure but investors are protected by diversification across asset classes and regions. If one asset class or region underperforms, another may outperform.

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