Unit Trust Investing

Collective investments (or unit trusts) are investments in which investors’ funds are pooled and managed by professional managers. Investing in shares has traditionally yielded unrivalled returns, offering investors the opportunity to build real wealth.

Yet, the large amounts of money required to purchase these shares are often out of reach of smaller investors. By pooling everyone’s funds in a collective investment, a portfolio of securities or shares can be put together, providing cost effective access to the world’s stock and securities markets.

Some factors to consider when investing:

  • Do you want to grow your investment or capital, or are you looking for income?
  • Will my investment be able to beat inflation?
  • Can you access your money when it is needed?
  • What are the costs involved in making the investment?

How does a collective investment work?

The investment portfolio is divided into equal parts. These are referred to as “units”. Each unit represents a direct proportionate interest in every asset in the portfolio. The investor purchases units, not shares in the fund. The price of the units reflects the value of the underlying investments. The price of the units therefore varies according to the market value of the underlying investments in its portfolio.

The unit price is known as the net asset value, or “NAV” price.

 

What can be included in a fund?

A fund’s portfolio may include a combination of financial instruments such as bonds, equities, money market securities, etc. Each fund has its own fund mandate, which stipulates how the fund may be invested.

 

Investor Protection

The Collective Investment Schemes Control Act (CISCA) provides the legislative framework for collective investments and offers investors well thought through consumer protection.

Disclosure guidelines are clearly laid out and add an extra layer of protection to the self imposed industry laid down guidelines. For example, before concluding a transaction with an investor, the manager must disclose details such as investment objectives, calculation of the net asset value, dealing prices, charges, risk factors, distribution of income accruals, and all other information necessary to make an informed decision.

CISCA also facilitates clearly laid out and flexible investment limits and structures for investment managers, which can enhance performance of investments in line with investment manager mandates.

Investors in unit trusts have always enjoyed great protection as assets are held in a trust, which is closely administered on the investor’s behalf by an independent trustee. This means that the investors’ money is held separately from STANLIB’s assets. STANLIB’s trustee is Standard Chartered.

 

Fund protection

Every collective investment is governed by a deed, which falls under the authority of the Registrar at the Financial Services Board (FSB). The deed defines the operating parameters of the portfolio (fund) setting out what asset types and markets the scheme will invest in.

Each portfolio has its own investment policy, which is described in the portfolio’s trust deed. The investment policies are usually described as investment goals/performance objectives and may include capital growth, generating income or both. The investment policy will indicate if the portfolio is a general or specialist portfolio, and the nature of the portfolio.

 

Return on investment

The return from a collective investment portfolio may be comprised of two elements: capital growth and/or income. Income can be split into three classes: Dividend, Interest and Rental Income.

Dividends are received from shares in the portfolio; Interest is earned on the cash and bond components and Rental Income from property shares held in the portfolio.

All collective investments have a certain degree of risk. The capital invested is never guaranteed as the fund value is always dependent on the movement of the underlying securities prices. Generally however, cash or money market type investments are less volatile while investments in the equity markets are more volatile. Offshore investments carry the additional risk of currency fluctuations. Depending on the investor’s risk preference, there are portfolios that can satisfy the investor’s needs.

 

Term of Investment

There is no minimum investment period, however, a medium to long term outlook (5 years or longer) is recommended for equity investments while cash and income type portfolios are more suitable for short term investing.
 

Why invest through collective investment schemes?

Collective investment schemes or unit trusts provide a fairly simple and secure option for investors with limited knowledge, time or money. They are accessible, flexible, protected, regulated and transparent long-term saving vehicles.

  • They provide one of the easiest and cheapest ways of diversifying a portfolio. By pooling investors’ money together, a spread of securities may be bought, which the individual investor may have not been able to afford, while helping managing the risk of being exposed to only a few securities or even asset classes
  • When you buy a collective investment, you are also buying the skills of a professional asset manager. Rather than having to thoroughly research every investment before you decide to buy or sell, you have the asset manager to do the work for you
  • Collective investment schemes are able to take advantage of their buying and selling size and thereby reduce transaction costs for investors. They also facilitate access to better yields in fixed interest securities which would not normally have been available to retail investors
  • Many investors like to phase their investment – that is they like to save a regular amount monthly, as their salary is paid into their account. Using a collective investment scheme makes this a very easy option for investors who know that regular saving through the ups and downs of the market eventually results in buying at lower overall prices
  • Collective investment schemes are wonderfully flexible. You can start, stop or pause your investment at any time without incurring any unexpected penalties or costs
  • They are also very liquid, i.e. you can sell part or all of your investment and access your savings within a few working days
  • Costs are reasonable and are always fully disclosed, as are the investment mandates and parameters
  • There are strict rules governing what a collective investment may invest in – and how much exposure to any one security the fund may have. These are all for your protection so that the risk in the investment is limited as far as possible
  • And the assets in a collective investment are held in a trust on your behalf – and monitored by an independent party to the company that you bought the investment from. This is to provide an extra layer of protection
 

Costs

The Net Asset Value (NAV) of the fund is the price at which you can buy or sell units in a CIS. This is the price that is published every day. Unlike share prices which fluctuate throughout the day, a collective investment has a fixed price for the day. The price is established each evening, using closing prices of investments for the day, and then applied to all the transactions that took place during the same day. 

Initial fees or once-off entry costs
Initial fees are a once-off fee applied when an investment is made. The initial fee is calculated as a percentage of the investment amount, and is deducted before units are bought at the ruling NAV price. The initial fee attracts a VAT charge (Initial fee x 14%).

Annual fees
Annual fees cover portfolio management, administration and ongoing annual broker fees. Annual fees also attract VAT is calculated daily and recovered monthly from the income awaiting distribution in the fund.

Compulsory fees
These are direct charges against the fund and hence against fund performance (like the annual fee). They could include fees payable by the manager in the process of buying and selling securities such as VAT on stock brokerage, Marketable securities tax and stamp duties. In addition auditor’s fees, bank charges, trustee and custodian fees are charged to the fund.

Switching fees
Switching fees are levied if an investor switches from one fund to another.  A switching fee is charged only if the customer has not yet paid the full initial charge e.g. if they switch from a money market portfolio where there is no initial charge to an equity or bond portfolio.

Total Expense Ratios
Total Expense Ratios (TERs) show not only all the explicit fees in the investment, but also include fund costs. So some of the compulsory fees such as fees that are paid to the trustee for managing the trust for example, and which are charged directly to the portfolio, are included in the TER.

It is realistic way of ensuring that the investor can see that their portfolio is being run efficiently. If funds were to trade frequently for example, the TER of that fund would be higher than its peers.

Costs matter. Investors should understand the costs they are paying for and the value they are getting for their money.

 

Successful Investing

It is well recognised that the best way to create wealth is to take a long term view on investments.

  • Pick a strategy and stick with it. There are many ways to be successful and no one strategy is inherently better than any other. Changing strategies or goals often is asking to lose money
  • Put your personal finances in order first. Investing without a goal is bad, but investing when you have high-interest debt is much worse
  • Invest in a well diversified portfolio, across asset classes and countries – it spreads your risk
  • Use the power of compounding. Start investing sooner rather than later. You will be amazed what a difference it makes to your investment returns
  • Don’t sweat the small stuff. As a long-term investor, you shouldn’t panic when your investments experience short-term movements
  • However don’t hold on to investments unnecessarily if they continue to underperform over long periods
  • Don’t chase a hot tip. When you make an investment, it’s important you know the reasons for doing so: do your own research and analysis or ask an adviser
  • Don’t try to time the market. Even the experts frequently get it wrong
  • Don’t chase the best performing asset classes or funds. You are too late already
  • Don’t put tax concerns above all else. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return but remember that your primary goal is to grow and secure your money
  • Focus on the future. Investing is about trying to make informed decisions based on things that are yet to happen