Don’t be put off by the numbers

2012-06-16 09:57

The abundance of unit trusts out there could send a pro into a spin. Here’s how to choose.

The choice of which unit trust to invest in is actually the last decision you should be making, says Wynand Gouws, head of retail distribution for Old Mutual Unit Trusts.

“You need to first determine what your goals are, and what you are saving towards. Then you need to decide how much you need to invest and, finally, where to invest,” says Gouws.

Savings goal
According to the Old Mutual Savings monitor, for most people, education, emergency funds and retirement are the three key reasons for saving.

Each of these savings goals have different time horizons and therefore require different types of investment objectives.

So you need to start with a plan.

You can sit with a financial adviser or you can use one of the self-help tools available on the internet to determine the length of time you have to invest and how much you need to save in order to reach that goal.

The correct type of fund
» Retirement savings are a long-term goal usually with a 20- to 30-year horizon.

Gouws says for this type of investment a general equity unit trust or balanced unit trust would be an appropriate investment vehicle.

Over time, inflation becomes a far higher risk than short-term market movements.

There is a high risk that your money will not be able to buy you the same goods and services in 20 years’ time, so you need to be invested in growth assets like equities (shares) and property, which give you returns well above inflation.

A balanced fund with a high exposure to equities (75%) would provide growth, but also offer some protection during more volatile market conditions as it is also invested in lower-risk assets such as cash, bonds and property.

For this type of fund, the fund manager should be aiming to deliver a return of 5% to 7% above inflation.

The Association of Investments and Savings SA categorises unit trusts based on their objectives.

Funds aiming to deliver returns above inflation with some protection are usually found under the category “asset allocation” as they are able to invest across a range of assets classes (equities, cash, property, bonds).

Within that sector, there are different subcategories.

For long-term retirement funds, one should consider unit trusts that fall under the subcategories of “flexible” or “prudential high equity”.

When you read the unit trust fact sheet, look at the unit trust manager’s benchmark to see if it aligns with your objectives.

If a fund manager is aiming to outperform the FTSE/JSE all share index, that would suggest it is fully invested in equities (shares).

A balanced fund or asset allocation fund will usually have an inflation-linked benchmark such as CPI+7%, although some fund managers have a benchmark to outperform the average of other managers in its sector.

If you want to invest in unit trusts but also want to take advantage of the tax benefits of a retirement annuity, you can invest in a unit-linked retirement annuity (RA).

This is simply taking the unit trust of your choice and “wrapping” it in an RA structure.

These are the most cost-effective RAs, especially if you invest directly with the unit trust company and not via an investment platform.

Most unit trust companies offer RAs and in some cases they do not charge additional fees for the RA wrapper.

» Most people have at least a five-year view for education savings, so the unit trust would need to include some equities for growth.

Gouws says a balanced fund would be an appropriate unit trust, but possibly with a lower risk mandate, such as inflation plus 4% to 5%.

These type of funds would fall under the “asset allocation” category with subcategories including “prudential medium equity”, “prudential low equity”, “absolute return”.

You do not need to invest specifically in an education plan to save for your education.

The only benefit of education plans is that they are usually term specific so you are unable to access the money before the specified time, which can help those who may worry about not being disciplined around saving.

However, these come with a higher cost.

» Emergency funds would be for shorter periods of time, so you need to be taking less risk as short-term market movements will have an effect.

Gouws says for a saving of two or less years, you should consider money market funds or fixed-income funds not equities.

These aim to match inflation or possibly provide 1% above inflation. These can be found under the “fixed-income” category.

Selecting your fund manager:
Once you have narrowed down your unit trust selection based on your needs, you will still have at least 10 to 20 funds to choose from, in some cases even more.

Now you need to make a decision as to who will manage your money.

Gouws says one should look for fund managers who have consistently met their benchmark targets.

If a fund manager over any three-year period has met its objectives, then that is exactly what you want to achieve.

All fund managers have good and bad years, and you will drive yourself insane trying to predict the next winner – and it will cost you money if you keep switching to “better” fund managers.

Research shows that the fund manager that topped the tables last year usually underperforms the following year as the conditions that favoured them have now moved against them.

In fact, it is usually the fund managers who have a good track record but which are currently underperforming that have the best chance of outperforming in the near future.

However, don’t worry too much about getting the fund manager selection right. You should be paying more attention to the costs of the fund.

The higher the costs, the harder the fund manager has to work to give you above-average returns.

A reputable fund manager with a lower cost structure that meets their benchmark over a three-year period will make you money.

What is a unit trust fund?
A unit trust fund enables you to pool your money with other investors who have similar investment objectives.

As an individual, you would need to have around R150 000 to invest in a portfolio of 35 shares listed on the JSE.

Through a unit trust, you can gain the same exposure from as little as R200 a month or with a lump sum of R1 000.

By pooling together the money of many investors, one is able to create a big pot of money that is then managed by professional investment managers.

The total value of a unit trust fund is divided into equal portions called units. When you invest your money in a unit trust fund, you buy units in the fund.

The unit price depends on the market value of the underlying investments in which the money is invested.

This unit price rises and falls according to the value of the underlying investments and is calculated daily.

Unit trust funds invest your money in different assets, including a wide range of local and international shares in companies listed on a stock exchange, bonds, property and money market instruments.

There are more than 800 South African unit trust funds, with investment mandates ranging from very conservative to very aggressive.

Conservative funds include money market funds and generally deliver a predictable return over the longer term.

However, these returns often do not beat inflation, although the risk of losing your investment is low.

Funds with more aggressive investment mandates include equity funds.

These funds aim to outperform inflation over the longer term, but at a higher risk of short-term losses.
Unit trust funds are collective investment schemes, which are regulated by the

Collective Investment Schemes Control Act.

In terms of this law, money invested in a unit trust fund must be held separately from the managing company’s assets and in a trust.

If anything goes wrong with the company, your money is therefore safe.

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