Unit trusts: where to invest

Durban - Many local fund managers are becoming decidedly cautious about high share prices on the JSE.

Large investment houses like Allan Gray, Investec Asset Management and Coronation Fund Managers are scaling back the equity exposure in some of their funds and holding more cash.

Yet according to unit trust inflow figures, retail investors are piling into the market at what could be a risky time.

The investment outlook for 2010 from a number of professionals can probably be summarised as follows: domestic equities are still the best likely asset for longer term growth - but don't expect the high returns of the past few years.

Listed property will still provide value, but also not the double-digit returns of the near past. Property should be better, though, than bonds or cash, particularly cash as the full effect of lower interest rates kicks in. Fund managers are quite bullish, though, on foreign equities, especially in developed countries.

Much of the strong performance on the JSE has been driven by resource shares. Similarly, domestic equity resources and basic industries unit trust funds have led the rankings for most of the time over the past five years. Top unit trust (according to the Morningstar rankings to the end of December 2009) is the Old Mutual Mining and Resources Fund, with a five-year return of 262.9%.

The next three places over five years are also occupied by resources unit trusts.

Steer clear of specialist unit trusts

But retail investors should not take this as a signal to buy resources funds. "Resources are currently on top of the pile; that will change in time.

"Retail investors, unless they have expert knowledge, should be careful of specialist unit trusts like resources. Under current market conditions they are probably better off in a balanced fund," said Darron West of Foord Asset Management.

Balanced funds combine the major asset classes, with the fund manager making the asset allocation decisions. There are five categories of balanced or asset allocation unit trusts, partly divided by the percentage of equities held in the portfolios.

Coronation is wary of resources. Pieter Koekemoer, head of personal investments, said within the company's domestic equity exposure it currently views the more cyclical shares, like resources, with caution.

"We continue to prefer the more defensive stocks, like food and pharmaceuticals, as well as large South African companies with significant offshore operations.

"The only cyclical shares we do like are the banks. They may be close to the top of the bad debt cycle. As that starts to ease over the next few years we expect the banks to do well, which means that current valuations are quite good."

Coronation forecasts local shares to provide an average return of 11% per annum before inflation over the next decade. That compares to 17% per annum over the past decade.

"South African investors will therefore have to lower expectations. But the problem is that local retail investors like chunky returns. If they try and get the same returns, they will have to take on far more risk," Koekemoer said.

In its analysis of quarterly unit trust performance, Plexus Asset Management said the best-performing sector for the month of December was value unit trust funds, up 4%.

Take the long-term view

Such a short time frame means little except to indicate a possible new trend, and value-based investing could be the safe option in the market.

John Biccard, who runs the Investec Value Fund, felt the local market is too high. "The JSE All-share Index is only 13% off its all-time high in May 2008. And at 2.1% the dividend yield is low, measured against the long-term average of 4.5%. There are very few shares I can find worth buying."

Foreign equities are favoured, because many managers feel share ratings were knocked down too low last year and they expect earnings to recover strongly off a low base.

Coronation, for instance, likes large multinational shares like Microsoft and British American Tobacco (BAT).

Selecting equities, and even unit trust funds, is going to be much more difficult in 2010 than a year ago. That's why balanced funds are being advocated for the non-specialist retail investor.

But with so many asset allocation unit trusts available, how does an investor choose a fund?

There's no easy answer, but West said a guide is to look at the reputation and track record of the investment house.

"Potential investors should also check out the fund's mandate, for example whether it's limited to local shares or can also invest offshore. And investors need to remember that equities are a long-term investment; they should take at least a five-year view. Also, don't look at the unit trust price every day."

- Fin24.com

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