Choosing the right unit trust for you client

Choosing the right unit trust fund goes beyond cherry-picking the top performing asset manager within a pre-determined asset allocation methodology. It requires a careful assessment of whether the preferred fund satisfies the dreams and aspirations set out in your clients’ financial plan.

The choice of a unit trust fund is compounded by the fact few of your clients take "rational” financial decisions, nor exhibit "normal” behavioral finance traits. They might insist on last year’s winner – or on going offshore each time the rand weakens, for example.

"Rational people care about utilitarian characteristics, but not value expressive ones, are never confused by cognitive errors, have perfect self control, are always averse to risk, and are never averse to regret,” notes Meir Stratman in the Financial Analysts Journal, 1999. "Normal people do not obediently follow that pattern.”

Your clients are "normal” rather than rational. This means that choosing a suitable unit trust fund becomes as complex as a game of chess, with a dash of emotion added in. It is a tough ask! In History of Chess, Chesmayne observes:

"There are 400 different positions after each player makes a move – 72 084 positions after two moves – nine million-plus positions after three moves – and 288 billion-plus different possible positions after four moves. There are more 40-move games on Level-1 than the number of electrons in our universe. There are more game-trees of Chess than the number of galaxies (100 billion-plus), and more openings, defenses and gambits than the number of quarks in our universe.”

A game of chess can take hours to complete… Yet financial advisors, the "miracle workers” of the financial services industry, must wade through similarly complex decision trees in just 90 minutes! How? The following steps will assist your in guiding your clients to investment Nirvana.

• Establish an investment mandate by finding a desirable investment outcome and agreeing it with your client.

• Consider the critical information about your clients’ return expectation, risk tolerance and risk appetite.

• Consider any legislative or compliance constraints, including whether you are dealing with own funds or prudential funds.

• Now identify the categories and sub categories of funds to satisfy the preceding conditions:

o Are the preferred sub category selections available at the Linked Investment Service Provider, online, at the institution of your choice or direct placing?

o Identify the best performing funds on return and risk over three-year rolling periods. Avoid volatility and standard deviation as these measures are meaningless over the long term. Eliminate under performers. If you cannot identify the best performing funds identify the funds that are clustered in the top quartile and that are constantly in that position.

o Diversify by identifying two or three fund of funds and let these fund managers do some of the fund selection work for you! This strategy makes sense because many advisors are not geared to handle the number of options available, and most do not have a Category II license.

o Consider Fund of Funds based on risk, performance and mandate.

o Scrutinize the fund mandates… You should question the presence of exotic equity-based derivatives in a conservative fund structure, for example.

o Request two quotes at LISP platforms. One with the different underlying funds and the other with your fund of fund choices. This provides an accurate measurement of the value of a fund of fund versus costs. The small cost difference (measured on a Reduction in Yield basis) will surprise you.

o Fees can be used as tiebreaker to separate the fund of funds or short-list of unit trusts approach.

o A final check is to determine whether the preferred fund manager "lives” in the same core value space.

These points should assist you in making quick and efficient decisions when choosing unit trusts funds to fulfill your clients’ investment mandates. Good luck!