Direct share portfolios take on equity unit trust funds

Direct share portfolios now challenge standard equity unit trust funds in terms of components underlying the above products, as direct share portfolios and/or unit trusts are often selected alongside one another as solutions for clients looking to invest for capital growth and wealth accumulation over time.

 

An international research company canvassed High Net Worth Individuals (HNWI) in terms of their respective asset allocations, and found that HNMI’s are overweight equities within their portfolios. Interestingly, the exposure to equities is achieved in two ways. Firstly, through equity unit trust funds (or mutual funds) and secondly, through direct equities or share portfolios, and the split between the two is roughly 50/50.

Financial advisers should consider a few broad considerations:

• Equity unit trust funds are generally very peer group aware and benchmark cognisant, and the ratings table that measures returns is often top of mind for fund managers;

• Share portfolios are typically not too concerned with peer group comparisons, benchmarks, industry and/or index levels or holdings;

• Most equity unit trust funds have a broad range of shares and holdings are often in excess of 30 or 40 shares in a portfolio with limited exposure to underlying shares – even shares that fund managers really like;

• Share portfolios offer a capital growth solution based on a higher concentration of shares, and higher conviction at play with fewer shares held in the portfolio (holdings can be between 10 and 15 shares in some portfolios);

• Unit trust funds with large share holdings and large assets under management will often find it difficult to actively manage funds and are often limited in terms of flexibility, whereas share portfolios that hold fewer shares can be nimbler around trades and exposure;

• Large equity unit trust funds can often behave much like an index as a result of the number of shares in the fund or the size of the fund, but a direct share portfolio can offer bespoke growth solution with greater emphasis placed on stock selection;

• The risk of investing in a large equity unit trust fund versus a smaller direct equity portfolio is lower and the volatility is also lower, so investors should be made aware of this important differentiator;

• There are generally no performance-based fees on actively managed share portfolios, while some equity unit trust funds may charge a performance-based fee;

• Equity unit trust funds offer clients the opportunity to make regular, monthly contributions and lump sum investments on the path to creating and accumulating wealth over the long-term, whereas direct share portfolios are often the domain for investors with larger lump sums to invest.

Ideally, clients and financial advisers will prefer to package investment products and components in one place. With a single client view, clients have the benefit of fee aggregation and the opportunity to combine and report on both pre- and post-retirement products and solutions.

 

Some linked investment service providers (LISP’s) have moved to include direct share portfolios and personal share portfolios (PSPs) alongside existing product ranges, available on both local and international product platforms.

Consider equities as an integral part of financial and investment planning for growth and income objectives or a combination of both.

Equities provide unique risk/return characteristics through diversification. The asset class also provides for passive income by way of a regular dividend stream or the compounding effect and contribution that dividends count toward total returns. It is equally important for an investment to beat inflation and retain purchasing power of time.