Understanding the unit trust universe

You have done your Asset Liability Modelling (ALM) for your client, arrived at the correct risk profile and return objective and are now ready to select funds for your client’s portfolio.

By researching various unit trusts you realise that there is a large investment universe available at your disposal, but where do you begin? Yes it is important to consider historical performance and the risk aspects of a fund, but have you as the financial adviser explored the qualitative features of a fund manager? If not, your investment recommendations may be at risk due to a fund managers qualitative qualities, business process inefficiency and key man risk, to name but a few.

Research methodology

One must consider the two very different aspects in fund research and that is quantitative and qualitative analysis.

Quantitative analysis refers to researching funds based on historical data which encompasses researching returns, risks and various ratios that indicate whether a fund has historically provided returns in excess of the benchmark.

Qualitative analysis takes a look at the softer factors of a fund management team and is possibly more important than quantitative research.

Unit trust due diligence

Quite a lot of financial advisers have opted to take a quantitative analysis of their investment recommendations to clients. The advice is largely based on historical performance of a fund, given the relevant risk category that clients fall into. A fund manager’s qualitative features are the reason behind historical returns of a fund being achieved, therefore it is extremely important to measure fund manager’s qualitative features.

Some of the factors that you need to consider in a unit trust due diligence are:

- the credentials of the investment team on a member by member basis
- assessing the portfolio manager’s incentives scheme to ensure quality staff are retained and
- determining the breadth of the investment team’s knowledge.

The value proposition

Developing and maintaining a system, taking into consideration these key due diligence factors when presenting your investment advice to potential clients, will ensure that your client’s investment has two clear benefits:

- It gives you peace of mind that the components of your solution have been carefully considered to build and preserve wealth, ensuring a safe and secure retirement for your clients.
- It satisfies the regulator, showing that due care and consideration has been employed in selecting a portfolio.

Clients need to understand the investment options presented to them in order for them to make an educated investment decision. Clearly communicating your value proposition can achieve this.

The way forward

This may seem like a daunting and cumbersome task, but it is critically important to consider the qualitative factors of a unit trust before placing your client’s hard earned savings into them. Here is a basic guideline to structure your investment due diligence:

- Conceptualise a due diligence questionnaire. The questions that are asked should attempt to determine best practices on two factors: the overall business practice - this will guide you into the corporate culture of the firm, and the specific practices relating to the fund your client wishes to invest in. It is important to note that funds with different mandates will have different investment philosophies and risk management policies.
- Subject to passing your due diligence questionnaire, it is vitally important to structure a site visit, this will give you the opportunity to critique the fund managers on anomalies you may have picked up in the questionnaire.
- Once you are satisfied that the funds pass your due diligence the next step is to optimise the components of your portfolio to achieve the best risk adjusted return.

By following these guidelines you will have a clear picture of the fund you are going to invest your client’s money into and it will ultimately result in peace of mind for both you and your client.