The Wealth Room

The best unit trusts to suit your needs

Investment philosophy and ethics

There is no one-size-fits-all option when it comes to unit trusts, as we all have different personalities and investment goals. Start by looking at the top asset managers in your country with excellent reputations. In South Africa, we recommend looking at Allan Gray, Coronation, Prudential and Investec to get you started. Then do some research on each company’s investment philosophy (how they buy and sell asset classes or shares to make you money) and see if you agree with their philosophy or not. After all, there’s no point in investing in companies when you don’t believe in their ethics or investment philosophy.

Age is important

The younger you are, the more risk you are able to take when selecting a unit trust. The reason for this is that you have plenty of time to ride out the market. What do we mean by this? Markets will always go up and down in the equity or shares asset allocation space. However, over the long period it has historically shown that equities always have an upward trend over a long period (5 to 10 years). So the younger you are, the more you want to focus on investing in the equity market or a moderate high risk unit trust.

If you are five years away from retirement and only have a certain amount of money you need to invest, and you’re relying on those funds during retirement, you should in no way look at entering into a high risk unit trust. The last thing you want to do in the few years before retirement is invest in funds that are very volatile, as those funds need to be guaranteed. If retirement is around the corner, with the prospects of no income, you won’t have much time left to rebuild your savings.

As you can see, we are always going to be dealing with asset classes and asset allocation when it comes to investing, so if you need a refresher, feel free to re-read the articles on Asset Classes and Asset Allocation.

Risk appetite

Some people don’t mind taking risks, while others are naturally more cautious. There is no right or wrong party, but it’s important to understand how you are wired emotionally when it comes to investing your money.

Many factors can influence your risk appetite for money or investing, but the most important thing is to understand your risk appetite. So you don’t invest in a unit trust with high risk, when you are only comfortable with medium risk. This will lead to sleepless nights, as you watch the markets go up and down everyday. The fear forces investors to sell out when their unit price is down and they ultimately end up losing money.

So, if you understand your risk appetite, you can avoid stress by making sure you’re invested in funds that are close to your risk appetite. This will allow you to forget about them and let time and compound interest kick in and work for you.

What are your investment goals?

Understanding your investment goal is critical to selecting the right unit trust. Here’s an example to get a better understanding of this concept:

Let’s say you have R20 000 and 5 years to invest these funds, but at the end of the 5 years you need R60 000 to achieve a specific investment goal. If we had to invest into a unit trust that is only giving you 10% return per year, which is your moderate conservative kind of fund, you will not get more than R31 000 after the 5-year period. However, if we look at a unit trust that gives you 24 to 25% return – this is your high risk unit trust like equities – then you’re more likely to meet your target or investment goal of R60 000. Yes, your risk appetite can sometimes work against you.

If you have a moderate conservative risk appetite, you need to understand that, so that when you invest in the high risk appetite portfolio, you are prepared for a bumpy ride.

How you want to spend your investment once you reach your investment goal is another objective that will determine how you invest your money. For example, if you’re saving for a holiday in 5 years, and the funds are not funds that will change your financial situation, then you can look at a higher risk unit trust. But if you’re investing to supplement your retirement, then you need those funds at retirement. This means that you can’t go into a high risk unit trust, as you don’t want to lose any funds you will need in the near future.

Costs

Many investors overlook or are not aware of the costs involved when investing in unit trusts. Fortunately it is one of the most cost-effective routes to go. Where else do you get access to lawyers, CAs and actuaries at a minimal fee?

However, there are still costs involved and you want to make sure you get the best value for your money.

“Price is what you pay and value is what you get.” – Warren Buffet

There are two costs that effect your Reduction in Yield (RIY). Let’s first break down the concept:

Yield is the possible returns that you can get on your investment.

Reduction is the cost you pay that will effect the possible return.

And now for the costs:

1. Asset manager fees:

This is the fee asset managers charge for their expertise and running costs. It can be broken down into normal management fees and additional performance fees, if they outperform the return they aimed for in the first place.

The more risky the fund, the more work needs to be taken into consideration, so the more they will charge. Keep that in mind when you’re doing comparisons. A conservative fund will have a fee starting at 0.25% and a high risk equity fund can have a fee of up to 3%, depending on the performance of the fund.

2. Certified Financial Planner® fees:

The first fee is called an upfront fee, for helping you set up the portfolio and giving you advice on what your investment portfolio should look like. This is normally only charged on lump sum investments. The fee can range from 0% to 3% legally. Make sure you are getting value for your money. Top Certified Financial Planners® will charge in the range of 1% and that fee can be reduced, depending on our investment.

The second fee is an annual fee. This is charged for monitoring the portfolio and making sure it is meeting your investment goals. The fee can range from 0% to 1.5% legally, however it’s a fee that can be dealt with upfront. The bigger the value of the investment, the more negotiating power you have.

Reducing the RIY or investment costs can have a huge impact on the outcome of your investment. For example, if you invest R20 000 over 5 years at 20%, you will be getting out R50 000. If you have costs of 2% in total, your return will be reduced to 18% and you can expect R45 000. However, we must point out that to get a return of R15 000 for the cost of R5 000 is a small price to pay. Unless you feel that you can do better.

Stick to your goals

Markets go up and down and the price of your unit trusts will go up and down. But you will only make a loss if you sell those units for less than what you paid for them. This may sound like basic mathematics, but when emotions come into play, maths goes out of the window.

When your investments don’t perform as well as you expected or they drop drastically as a result of the financial markets, remember that you still have the same amount of units. So before you sell them off, rather wait for the unit price to go back up. The units will bounce back over time and be worth more than what you paid for them. You can then sell them at a profit.

When you have a clear investment goal, it will be easier to stick to your investment strategy. Yes, there might be the rare occasion when funds really crash, but then draw a clear benchmark for yourself. Decide how much you are prepared to lose, before your emotions will cause you to withdraw or sell the units at a loss. It’s like Gary Player once said, if you aim at nothing, you will hit it every time.

The goal in all of this is to build your confidence, so that when you start your investment journey, it’s a journey you enjoy and not one that causes pain. If you’re not 100% comfortable with investments and don’t have the time to do the research, contact us so we can help you through this process.

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