The Wealth Room

Understanding Unit Trusts

Today we are going to discuss Unit Trusts and how Unit Trusts work. If you haven’t read my last 2 articles on Asset Classes and Asset Allocation, I recommend that you have a quick read through those first as they form the foundation for this post and for your best understanding of Unit Trusts. I assure you that understanding Asset Classes and Asset Allocation, will change investing for you forever.

I am going to start at the very beginning and break down what Unit Trusts are.

Unit trusts are when companies like Allan Gray (Asset Managers) buy Asset Classes on behalf of us in bulk and at a much lower price or a better interest rate on bonds etc. They then take the different Asset Classes and combine them into what we call Funds.

For example all Asset Managers will have what we call an Equity Fund and this fund consists of only Equity’s or in layman’s terms shares of companies on the JSE that the Asset Manager feels are good companies and managed to get them at a good price. Because Asset Managers will have a number of investors, they can then lump all of the money together and go to the JSE and buy BLUE CHIP SHARES or shares in all of the big companies that everybody wants to invest into, but can’t because they are too expensive to invest into on an individual basis.

The Asset Managers have got CA’s and Actuaries working around the clock, figuring out what the best price is to pay for certain shares. So they can differentiate easily between which shares are well priced and should be bought and shares that are overpriced and should be left alone.

 

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

How do Unit Trusts work?

Let’s take an equity fund for an example. The Asset Managers will buy shares off the JSE and take these shares and put them into a trust. The Trust does not give the shares back to each investor, but rather combines all of the shares into a portfolio of equity’s or shares. The Asset Managers then takes the portfolio and divides the portfolio into many equal units. This is how the name Unit Trust came about… Units that come from a Trust! Then we as investors can get a certain amount of units depending on how much money we invest in the fund.

So each unit will then have a price, and the better the fund does the more the price of the unit will go up or the other way around. So instead of you having all of your money invested in one company, you now have shares of 50 different companies.

That is an example of an Equity Fund, but the exact same principal will be used when it comes to combining other Asset Classes into one fund. It’s all about the Asset Managers buying asset classes in bulk at a better price and then lumping different Asset Classes into different portfolio’s. So by now you see how important it is to understand Asset Classes and Asset Allocation before you could understand the background of how a unit trust works an ultimately how all investments work.

 Why invest in a Unit Trust

•  Anybody can invest in a unit trust in two ways:

1. Monthly amount, most companies have a minimum of R500 pm.
2. A once off Lump sum amount, and there again, most companies will have a minimum of R20 000.

– It takes a lot of risk off our back as we don’t have the expertise or time to value Assets Classes all day long… so it’s better to leave it to the experts.

– Fluctuation of your share in the units are not as drastic as it would be on the Stock Market, as you have many companies shares in your portfolio and they balance each other out. So this will allow you to sleep better at night.

– You can divide your unit trust portfolio to meet different investment goals, as many goals will have different terms and objectives.

– Unit Trusts have many different options that you can select from, that have different Asset Allocation and also different amounts of Risk.

– Unit trusts are flexible, so you can increase your monthly premium or add lump sums as you like.

– Unit Trusts are also liquid, so that means you can have access to your funds, within 3-4 working days, if another great investment opportunity comes up or disaster strikes.

 Unit Trusts In a nutshell

In simple terms Unit trusts are really portfolios of assets such as equities, bonds, cash and listed property, in which investors can buy units. This allows us to get access to many different Asset Classes simply and at the best possible price, therefor maximizing your returns from the very beginning. There are many different funds that you can link to your unit trust, depending on what kind of Asset Allocation you would like, or how long you want to invest for and also if you have specific goals.

I hope this has helped you!

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All Video Clips are supplied by Allan Gray