A unit trust is a medium to long term investment which enables you to invest in markets that might otherwise be difficult to access. When investing into a unit trust, your money is pooled with that of other individual investors giving a spread of professionally managed money market, bond or equity instruments.
Most unit trusts are open ended trusts where there is no limit to investors participating in the fund, and the number of units fluctuates only upon the supply and demand requirements of investors. As a unit trust investor you purchase units at the time of investment and these represent your overall share of the Unit Trust fund. The price of the units is valued daily and is dependent on the value of the underlying investments in the pool.
Unit Trusts are an ideal medium to long term savings vehicle for investors with little saved capital and or lower disposable income.
Unit Trust are more expensive in the fees they charge than having your own bespoke equity portfolio and are in many instances conservative in the returns that they bring compared to a privately owned managed balanced equity portfolio.
If you have a minimum of R200 000 to invest you should not be invested via a Unit Trust as your costs will be substantially reduced having your own managed equity portfolio and your returns in many cases will be significantly higher. There is also no sound reason to be invested in Unit Trust as well as having an equity portfolio as you will be duplicating your investments and increasing your costing even more. It is possible to replicate a Unit Trust fund privately if you have the minimum funds to invest suggested above.
The reason investment advisors will often place your funds into a Unit Trust is that it is perceived to be the easiest and least risky rout to take and I say perceived because at the end of the day your money is going into the same place as it would if you structured your own portfolio. The commission kick back is substantially better to the introducer of the funds to the Unit Trust operators than it would be to the advisor if you chose to structure your very own portfolio with the help of a professional manager.
If you have R200 000 or more invested in Unit Trust you should be asking yourself why? It is not safer, more often than not they don’t give better returns than a private equity portfolio and you can replicate the fund’s portfolio on your own if you like it that much. It is cheaper to have your own portfolio and it can be managed too for less.
A private equity portfolio manager is free to invest and balance an equity portfolio at will and therefore can respond to market conditions far quicker than a Unit Trust manager who operates with restrictions. Both are governed by the Financial Services Board.
Requirements of Unit Trust management and companies
Unit trust management companies are required to operate their investments with certain requirements or mandates laid down by the Financial Services Board and the association of unit trusts.
These include the following:
- Returns - Don't expect excessive returns from the stock market try to outperform inflation by two or three percent.
- A unit trust must have 5% of its investment in cash.
- A unit trust may not own more than 5% of the issued shares of any one listed company or 10% in the case of shares in a company with a capitalisation of more than R2 billion. No more than 5% of the market value of any portfolio may be invested in any one share.
- Specialist funds must hold investments exclusively in that sector.
- No fund exposure to derivatives can exceed 20%.
- Income, bond and money market funds have to meet special requirements in terms of the maturity of their investments.
- Prudential unit trust funds must comply with regulation 28 of the Pensions Act and must not have more than 75% of the portfolio in equities or shares.
- It is recommended that all management companies hold an investment of at least 10% of the total number of units in each portfolio. They are limited to a maximum of R1 million per fund.
Two prices are quoted in the daily newspapers for each unit trust, namely a buy price and a sell price. The sell price, or repurchase price is the price at which the fund manager will repurchase your units at, whilst the buy price (the higher of the 2 prices) is the price the investor would buy units at.
The difference between the buy and sell price is known as the initial charge. These include broker commission, fund charges, marketable securities tax and VAT. A unit trusts' price is fixed on a daily basis.
Most companies use future or forward pricing to calculate the day's price of their units. This means that all sales, repurchases and creations of new units are processed at the end of the day at the "close of business" price, from the previous day.
- Unit trusts will now be issued in several classes from the same unit trust fund. Each class of fund will hold the same stocks, share the same assets, and will be handled by the same fund manager. Funds launched before deregulation (June 1998) will be called "Class R" funds. This will include all existing unit holders prior to deregulation.
- New investors will now invest in "Class A shares" with higher annual service fees and could also include performance-related fees and back end fees.
- Institutional investors such as Pension / Provident funds will be classed as "Class B" funds. As the institution investor requires less service they will be charged lower fees.
Service fees are deducted from dividends and interest before they are distributed to investors.
How much can I invest?
Whether you invest by a monthly debit order or by a single lump sum is a personal choice. Monthly debit orders offer the benefits of rand cost averaging. This means that peaks and valleys in the market tend to be smoothed out through regular contributions.
Minimum monthly investments are generally R300 per month, while lump sums are R5 000 per investment. These amounts can be varied at any time.
Which unit trust should I choose?
A good financial advisor is imperative to guide you through the necessary analysis before you make your choice.
Excellent historic performance on a fund is no guarantee of future return, and the insight a good advisor can give you into an Asset Management company in general and a fund manager in particular will be invaluable in assisting you with your choice.
It is always important to bear in mind there are no capital guarantees on unit trusts.
If you would like an opinion on your Unit Trust or portfolio thereof, would like to know which Unit Trust is the best for you or to find out if you should be in Unit Trusts, we are happy to advise you on what will suit your particular needs.