Have you read the Collective Investment Schemes Control Act no. 45 of 2002?
Of course you haven’t. Nobody has. It’s so boring that reading the act out loud has been endorsed by the World Health Organisation as an emergency alternative to general anaesthetic.
The whole point of investing in unit trusts that someone else does all the tedious technical work.
That’s makes unit trusts a compelling investment option for busy people with no special expertise in finance or economics. You choose a unit trust, you invest a lump sum or make a monthly contribution, the fund manager does her thing, and, all going well, you collect a nice return. What could be easier?
But not all unit trust products are equally suited to realising your goals. And not every unit trust provider makes an equal claim to trustworthiness. You are going to have to perform some due diligence before you kick back and let your investment take care of itself. Don’t worry, it’s pretty straightforward.
The first thing you need to consider is your investment’s risk profile. If you’re thinking of investing in unit trusts, you’re presumably okay with incurring some additional risk, or you would just keep your savings as cash.
A unit trust fund’s risk profile has a lot to do with asset allocation. In other words, where your money goes.
Generally speaking, funds that allocate assets more heavily in equities are expected to offer larger potential returns. However, these funds are commensurately more risky. As with any investment in equities, there’s always the risk of a market downturn. And because these funds are actively managed, there’s always the risk that your fund manager will do something really stupid.
(You can eliminate the risk of your fund manager doing something really stupid something by eliminating the fund manager. For example, by investing in an ETF that tracks the top 40 shares on the JSE. Fund managers will counter that their savvy, experience and hard work is needed to outperform those benchmarks.)
Allocating more of the fund’s assets in, for example, bonds and cash reduces the risk of incurring losses but can also lower potential returns.
Unit trust funds’ risk profiles are usefully labelled with evocative terms like ‘Assertive’ and ‘Aggressive’, but it is good practice to examine the asset allocation yourself to better understand what these labels actually describe. Don’t hesitate to interrogate your financial advisor or the next passing banker if you have any questions about the financial instruments described in a fund’s prospectus.
The test of time
Choosing the type of unit trust fund you which to invest in is half the journey. Now you have to decide who will manage your money.
Here are some points to bear in mind:
- Make sure you only ever invest with a registered financial services provider that complies with all relevant legislation. It can also be useful to establish whether a provider has a proven track record.
- You may also wish to look at the historical performance of the relevant funds. All investors should have “past performance is no guarantee of future results” embroidered on their wallets, but if a fund produces consistent returns over a significant period of time, that is at least some evidence that the fund managers know what they’re doing.
- Get a comprehensive breakdown of all fees, including management fees and performance fees.
- Try to ascertain if a fund is doing anything unduly complex or unusual. The investor community was taken aback last year when a fund operated by Third Circle MET lost two-thirds of its value in two days. It seems that the fund was employing an advanced hedging strategy aimed at reducing volatility, a strategy that backfired spectacularly. The good news is that such an approach is unusual. The bad news is that understanding the advanced strategies employed by a fund requires expert knowledge; if you have any concerns or question, it’s a good idea to speak to a financial advisor or trusted expert.
It’s no surprise that unit trusts are so popular with South African investors. They’re a convenient way for anyone to invest, and flexible enough to meet a range of investment goals. That makes unit trusts an attractive investment even if you have no specialist knowledge of finance. Just be sure you know precisely what you’re investing in, and whom you’re investing with – something to remember when making any investment.