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Investing

What Are Unit Trusts?

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Unit trusts are a well-established way for people to invest in the markets. They allow individuals access to bigger portfolios where they can enjoy the gains and cost savings associated with the size and scale of these portfolios.

This article is the first in a series on unit trusts and delves into the basics of unit trusts, how they work and their benefits.

What are unit trusts?

Unit trusts are Collective Investment Schemes (CIS) that pool the money of investors, which is then invested in financial instruments such as equities (shares of companies), bonds and property. This pool of money is divided into equal units that investors buy in proportion to the amount of money invested. Investors then share in the fund’s gains, losses, income, and expenses.

There are a variety of unit trust options available to investors, according to the risk associated with the underlying assets. For example, income-related unit trusts are lower risk, while equity-related unit trusts are higher risk.

How they work

A management company (MANCO) is responsible for the administration of a unit trust. A fund manager makes the investment decisions for the unit trust, researching financial instruments that have attractive return prospects and investing the funds into them. The fund manager ensures that the unit trust is invested in line with its mandate and has the appropriate risk characteristics, and is paid a management fee by the investors. The MANCO monitors the assets in the fund and notifies the manager if there is a breach of compliance within the fund.

Unit trusts can be actively or passively managed. The goal of active funds is to beat a benchmark (usually the market) through research that informs more frequent or short-term trading decisions. As such, active funds require more direct involvement by the fund manager. On the other hand, passive funds are set up to track the market’s performance through a portfolio that mirrors a market index. The passive fund manager does not trade frequently, and usually, rebalances the portfolio every quarter. The management and administration costs are therefore higher for an active fund than a passive fund, because of the greater involvement required from the fund manager.

Unit trusts invest in listed securities and can, therefore, be priced daily as they track the value of the underlying assets and this allows investors to invest/withdraw money on any trading day. Prospective investors will send an application form to the MANCO, which then opens an account and buys the units of the unit trust for the investor. Sharenet Investments offer unit trusts – find out about the Sharenet BCI Global Balanced FoF and download its latest fact sheet here.

Benefits of unit trusts

Your money is in safe hands. The fund manager makes the investment decisions, but can’t access your cash. Instead, a custodian (trust company or bank) is responsible for holding and safeguarding the securities owned within a unit trust.

Unit trusts are regulated by the Financial Services Board (FSB) – soon to be renamed the Financial Sector Conduct Authority (FCSA) – and the legal structure prevents anyone from taking your money.

Unit trusts spread your money across many instruments, which if done right lower investment risk. It is unlikely that you will see a negative return on a unit trust over an investment period of more than five years depending on the type of unit trusts you are invested in.

You can easily trade unit trusts. There is no lock-in period for your investment, giving you liquidity with one days’ notice for withdrawals.

It is easy to track the performance of your investment. Most MANCO’s give online access and monthly statements to their investors. You can also find unit trust performance tables published in the media, and the fund manager will provide monthly fact sheets containing information about the unit trust’s performance and holdings.

Unit trusts are not just for the wealthy, you can invest in any unit trust by starting with a small lump sum or even a monthly debit order. This empowers investors to gain exposure to large assets like shopping centers and blue-chip companies with a small investment.

Conclusion

Unit trusts are an accessible, flexible and straightforward investment, making them one of the easiest ways to grow wealth. You decide how much and how often to contribute to the investment through lump sum payments or regular debit orders, and you can withdraw the funds and receive the cash within days.

Do you have any questions on unit trusts and how you can start investing? Contact Sharenet’s fund team or your financial adviser today.

Offshore Investments Made Easy

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The Johannesburg Stock Exchange (JSE) is the largest stock exchange in Africa (and 17th largest in the world), yet the entire African continent only accounts for 1.5% of global stock market value. Other asset classes like SA bonds and property also only make up a fraction of the global value. Taking advantage of investment opportunities offshore means that you as an investor not only diversify your country risk, you also get exposure to some of the fastest growing and exciting industries globally, many of which you are probably making use of every day.

Source: Visual Capitalist

You could have found this article through a search on Google that led you to Sharenet Views. Your computer, possibly manufactured by Dell, uses Windows software that Microsoft produces. Or perhaps you are reading it on your Apple iPhone. These companies are all publicly traded companies that you can invest in. Is technology not your thing? Well then perhaps transport is. If you drive an Audi or Polo you can invest in Volkswagen. Maybe you’re thinking electric cars are the future, so why not invest in Tesla? If an automobile is thinking too small for you, then go with airplanes instead and invest in Boeing. These industries are not available on the local market, but fortunately, the offshore market is now available on your doorstep and there are a few simple ways to gain access to it.

#1 Open a trading account that allows access to foreign stock markets

This is an option only confident investors should consider. Many who try picking companies on the JSE will find that it’s not that easy sifting through nearly 500 companies and picking a winner. Now imagine having to go through that exercise with over 5 500 companies listed in the US alone. If you think you have what it takes, there are brokers in SA that offer access to foreign stock exchanges.

#2 Invest directly in a foreign unit trust

You may not have the skills or time to make the best stock picks in the global market, so why not leave that to the professionals. There are thousands of funds to choose from, but knowing which one is best suitable for you is a daunting task. In addition, you will need to get SARB approval to take your money offshore, adding more time to an already administrative intense process.

#3 Invest in a locally domiciled global unit trust

This is by far the easiest method for the South African investor to gain exposure to international markets. There are unit trusts domiciled in South Africa, meaning you make your investment in ZAR. The fund managers of these funds then convert that ZAR to foreign currencies, like USD, to buy assets in offshore markets. Your investment exposure is in a foreign asset and currency, but your statement always reflects the ZAR value of your exposure. If you feel that you don’t have the required expertise or time to decide which fund to invest in, you could consider a global fund-of-funds where the portfolio manager picks the combination of global funds he/she thinks will deliver the best performance. The Sharenet BCI Global Balanced FoF is a good example of this type of investment.

#4 Buy a global exchange traded fund (ETF)

It is easy for local investors to buy an ETF either through a trading account (like Sharenet Securities), LISP or directly from the provider. A global ETF is a passive investment and tracks a global market index. ETF’s are listed locally, meaning you make your investment in ZAR and get your money back in ZAR when you sell, but you get the exposure to the foreign asset and the return from it. There are assorted options available to local investors that could give you exposure to specific regions.

Conclusion

Investment into international markets has never been easier for South African investors and global brands like Apple and Facebook are virtually at your fingertips. It provides a valuable addition to your portfolio, with fast-growing sectors abroad that could offset weakness from a stagnant South African economy. It also provides good diversification away from political risk specific to SA and it’s easily accessible through several channels that require little admin and time.

10 Reasons to Consider Property

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Unit trusts are excellent investments that can give investors the opportunity to participate in the growth of large businesses and investment assets. Property unit trusts open a door to the property industry with more to offer than an individual could ever hope for in the buy-to-let market. Property funds invest in listed property companies that develop and manage real estate in different sectors (office, retail, commercial, residential) and geographies.

The benefits of investing in a unit trust rather than buy-to-let property make a compelling case for why property unit trusts should be considered if you are looking to enter the property market. This article is focussed on investors that already own a primary residence and is looking to invest in the property market.

1. Selection

The fund manager of a property unit trust selects which property companies to include in the portfolio, raising the likelihood of realising attractive returns on the investment. A buy-to-let property, on the other hand, could be situated in a neighbourhood where there are low growth and few tenants.

2. Historic performance

The total return from listed property has exceeded residential property over the last 5, 10 and 15 years to 30 June 2017 (see below table). Total return includes price appreciation and income. For residential property, an income yield of 7% is assumed with the average buy-to-let property providing income of between 5% and 8% after fees.

Figures as at 30/06/2016. Source: Bloomberg, INET, Sharenet. Listed Property (FTSE/JSE Listed Property TR Index – J253T). Residential Property (BIR Residential Property Price Index plus 7% for the yield component).

3. Size

Adding property to your investment portfolio is a fantastic way to add diversification and potentially boost return. Most investors who buy a property to let will have to allocate a very large portion of their capital to the investment. This means you could risk a substantial portion of your portfolio on a poor investment decision. Unit trusts have much lower investment minimums. The Sharenet BCI Property Fund has a minimum lump sum investment of R25 000 (or R1 000 per month debit order). It allows the investor to only invest the amount that he/she is comfortable with.

4. Diversification

Diversifying your portfolio across multiple asset classes can boost return and improve the consistency of your return. The concept is the same for diversifying between different property sectors like shopping malls, office parks, warehouses and apartment blocks. Unit trusts give investors exposure to these sectors across multiple cities (geographic diversification). Compare this to one apartment in one location and you can start to see that the risk of investing in buy-to-let properties is higher.

5. Liquidity

Unit trusts are liquid investments, meaning you can withdraw your money and have it sitting in your bank account within days. Rental properties are not liquid and could take months (sometimes even years) to sell. Should you need to sell immediately, you may have to put the property up for sale at a much lower price and even then, it will be several weeks before you see the cash from the sale.

6. Costs

Unit trust fees include ongoing management, performance, admin and transaction fees. All these fees usually amount to less than 1.5% per annum for most property funds. Rental property fees dwarf that of unit trusts. To buy or sell a property will see fees associated with the transfer, agent, conveyancer, deeds and other admin fees. Ongoing costs will include insurance, taxes and levies. All these fees can cut a sizable chunk out of your property investment’s performance.

7. Risks

Rental properties carry a lot more risk than an investment in a unit trust. There is vacancy risk if you struggle to find a tenant or can’t get a tenant to pay, causing you to lose income. Listed property also has vacancies, but these are usually less than 10% of the property portfolio, meaning the bulk of the portfolio still delivers income each month.

Listed property is more volatile and your investment can fluctuate a lot more than rental property.

Rental property requires maintenance and something like a geyser bursting is a problem that needs immediate fixing.

8. Leverage

A good case for rental property is that you can take on leverage and use a loan to finance your property investment. Many investors don’t know that listed property companies can also take on leverage and can use clever ways to finance property investments (and at a lower interest rate than individuals can get).

9. Admin

Investing in a unit trust is very simple and can be done within a few minutes. To invest with Sharenet, visit our Investments website. Rental property on the other requires a lot more of your time. You need to screen tenants, run credit checks, set up and negotiate contracts, do viewings, collect rent and address complaints to name a few. You can get an agent to do all of this for you, but that is an additional cost that takes a bite out of your return.

10. Track performance

Unit trusts are priced daily and you can view the value of your portfolio online at any time. Fund managers are also required to provide a monthly fact sheet that shows how your money is invested. It is easier to track the performance of your investment than with rental property.

Conclusion

Property unit trusts hold all the cards relative to rental property. Listed property performance is historically higher than rental property. The risks associated with property unit trusts is less than with rental property and unit trusts are also far easier and less time to consume to invest in than rental property. There are benefits of owning your first property (including tax breaks and cheaper borrowing), but this article focuses on a buying-to-let property where the investor is looking for property exposure in addition to his/her primary residence.

It is easy to add property to your investment portfolio and now you can invest with Sharenet. Visit our Sharenet BCI Property Fund page to find out more.

Balanced Funds

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Balanced funds (also known as multi-asset funds) are by far the most popular unit trusts and is the vehicle of choice for many investors saving for retirement. Balanced funds are designed to achieve long-term real returns in a more stable and consistent manner than a single asset class fund (like equity funds). They use a combination of different asset classes to maximise real return (after inflation) while being cognisant of risk. This article explores the typical construction and variants of these funds on offer to South African investors.

Asset allocation of balanced funds

Balanced funds generally seek to maximise risk-adjusted return. This means that the fund manager needs to construct a portfolio that could generate attractive returns while reducing the likelihood of making losses. This is achieved by including different asset classes in the portfolio like local or international equity, bonds and property.

The asset split depends on the aggressiveness of the fund’s mandate i.e. whether the goal is capital preservation or growth. A fund that aims to generate capital growth will allocate a higher proportion of assets to equity. This makes the fund more aggressive and adds risk, but also has the potential to deliver higher return. If the aim is to preserve capital by beating inflation, then the fund manager will allocate less of the portfolio to equity and buy less risky assets like bonds and money market instruments.

Fund managers can actively manage the asset allocation of the portfolio or elect to keep the asset split near pre-determined weights. The benefit of actively managing the asset allocation is that fund managers can purchase the asset class that is expected to deliver the highest return. If there is pessimism in equity markets then the fund manager can switch from equity into bonds and cash to avoid losses. This method has higher transaction costs and adds the risk that the fund manager makes a bad call on selecting asset classes. Therefore, fund managers often hold the portfolio’s construction close to its strategic weight. The strategic weight of the portfolio is the asset split that has historically delivered the most attractive return for a certain level of risk over the long term.

How to Choose Between the Types of Balanced Funds

Balanced funds can be divided into different risk categories ranging from cautious to aggressive. One method for investors to distinguish between these categories is to look at the sector that the fund is classified in. Most Balanced funds are divided into four sectors namely, Multi-Asset Flexible, Multi-Asset High Equity, Multi-Asset Medium Equity, Multi-Asset Low Equity.

The Multi-Asset Flexible sector includes funds that have flexibility in their asset allocations. The Sharenet BCI Flexible Fund can be placed in this category. Most flexible funds are managed with active asset allocation and aims to maximise long term growth. Some fund managers in this sector use the flexibility of switching between asset classes to manage the risk in their portfolios.

The Multi-Asset High Equity sector is the category of funds most popular among retirement savers. Funds within this category are limited to a maximum of 75% in equity and the funds eligible for retirement savers have an additional limit of 25% international exposure. The Sharenet BCI Balanced Fund is a great option if you are looking for this type of fund. High Equity Balanced Funds are designed to grow capital over the long term while diversifying across asset classes to add more stability to returns. Investors with a moderate to aggressive risk profile, like those saving for retirement, are most suited to these funds. If you are looking for a step-by-step guide on how to invest for retirement then read our article on Saving for Retirement.

Funds in the High Equity sector usually don’t generate enough income for investors looking to periodically withdraw money. These investors can find cautious funds in the Medium-and Low Equity sectors that allocate more to income generating assets. The funds are typically used by investors who have already retired and provide more stability in returns with a constant stream of income.

Conclusion

There are multiple strategies used by balanced fund managers with a degree of asset allocation decisions faced by each fund. Some fund managers are very active when it comes to switching between asset classes like equity and cash while others prefer to stick to an allocation that does its job in delivering attractive returns over time.

There are mainly three types of balanced funds split into different risk categories (cautious, moderate and aggressive). Sharenet offers its clients a simple entry into one of these fund categories with its fund of funds range:

Cautious – Sharenet BCI Conservative FoF

Moderate – Sharenet BCI Moderate FoF

Aggressive – Sharenet BCI Aggressive FoF

Income Funds

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Unit trusts cater for almost any need and there is a whole category of funds dedicated to providing investors with income. This article looks at income funds and the ways fund managers invest to maintain a constant flow of payments.

Sources of Income for Funds

Income funds focus more on providing investors with strong levels of income rather than capital growth. The main source of income for income funds are interest and dividends. Interest income is usually received in the form of coupon payments received from bonds, debentures, notes, preference shares and money market instruments in the fund. The fund reinvests this income and then periodically distributes it to investors on pre-determined distribution dates that could be monthly, quarterly or semi-annually. These dates are available on the fund fact sheet (minimum disclosure document).

Income funds can also invest in property. Individuals often buy property as a source of income. The property is bought and then put up for rent to receive the monthly rental income. Income funds are no different and invest in property companies listed on the Johannesburg Stock Exchange. These listed property companies receive rental income from their property portfolios and also make profits from selling property. This income and profits are then paid out as dividends. Another group of property companies known as Real Estate Investment Trusts (REITs) have to pay out at least 75% of its income to shareholders. It’s important to note that the payments from REITs are taxed as income while dividends from listed property- and equity companies are subject to dividend withholding tax. Unit trusts will indicate how the income is split between interest and dividends.

Why Yield is Important

The yield of an investment is the rate at which you earn income on your investment. If you invested R10 000 in a fund and over one year the fund pays out a total of R1 000, then the yield of the fund is 10% (1 000 ÷ 10 000). Now why is it so important to know what your yield is on an investment?

The main objective of investments is to create wealth or at least to preserve it. The value of R100 today is certainly worth more than the value of R100 you will receive five years from now. That’s because money loses value or purchasing power over time due to inflation. A smart investor knows that to create wealth, you first need to beat inflation. The return on income funds is predominantly measured by its yield and this usually is an indicator of the income you can expect to receive from the fund over the next year. The yield of your investment should therefore be higher than inflation and this difference is known as the real return (or spread above inflation).

Investor Profile

Income funds are mostly used as the low-risk portion of a portfolio aimed at generating cash flow for the investor. Someone looking to cover day to day expenses with their investment should consider an income fund, as these funds generally pay out income monthly or quarterly.

Income funds offer investors a return that beats inflation (currently about 5.5%) with little variability in the return. Your money is also readily accessible and funds can be withdrawn within a couple of days, giving the investor liquidity in case of an emergency. This makes income funds an attractive alternative to bank savings accounts that normally offers lower returns, and fixed deposits that lock you in for a set term and offers lower returns. The time horizon for income funds is generally short term (shorter than three years) and longer term investors should consider adding growth assets to their portfolio to maximise return. If you are looking to save for a down payment on a house or that overseas holiday you have been promising yourself, then an income fund is a great option to consider.

The Sharenet Income Plus Fund offers investors the opportunity to invest in an income fund that has returned more than 9.40% over the past year to supplement your income or to help to make your dreams come true.

Unit Trust Sectors

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Fund Managers often compare their fund performance to the “sector” or their “peers”, but what exactly are they referring to and how are the funds they use for comparison grouped together?

The Association for Savings and Investment SA (ASISA) is a non-profit company that plays a significant role in the development of the social, economic and regulatory framework in the unit trust industry. One of its tasks is grouping unit trusts into 33 categories based on fund objective, investment policy and restrictions like asset class exposure and region. The range of unit trusts in the market is continuously expanding and the number of categories could change. There are two tiers of classification.

The first tier of classification:

South African portfolios

Invest at least 70% of their assets in SA with 25% allowed in foreign markets and a further 5% in Africa.

Sharenet Investments manages 9 South African unit trusts.

Worldwide portfolios

Invest in both South Africa and foreign markets.

Global portfolios

Invest at least 80% outside South Africa.

The Sharenet BCI Global Balanced FoF falls within this category.

Regional portfolios

Invest at least 80% in a specific country or region.

Second tier of classification

Equity portfolios

Invest at least 80% in equity and seek maximum capital appreciation as their primary goal. There are 7 sub-categories of equity portfolios.

General; Large Cap; Mid & Small Cap; Resources; Financials; Industrials and Unclassified.

A fund is classified in a specific sector if it has at least 80% exposure in the sub-category specified.

The Sharenet BCI Equity fund that is classified in the SA Equity General sector.

Multi-Asset portfolios

Invest in a wide spread of investments in equity, bond, money and property markets. There are 6 sub-categories of multi-asset portfolios.

Flexible – Unit trusts in this sector have a significant degree of discretion over asset allocation and often sees managers actively manage the asset split to maximise return.

The Sharenet BCI Flexible fund is classified in the SA Multi-Asset Flexible sector.

High Equity – Unit trusts in the High Equity sector are limited to a maximum exposure of 75% in equity and 25% in property.

The Sharenet BCI Balanced fund and Sharenet BCI Aggressive FoF are both classified in the SA Multi-Asset High Equity sector.

The Sharenet BCI Global Balanced FoF is classified in the Global Multi-Asset High Equity sector.

Medium Equity – Unit trusts in the Medium Equity sector are limited to a maximum of 60% equity and 25% property exposure.

The Sharenet BCI Moderate FoF is classified in the SA Multi-Asset Medium Equity sector.

Low Equity – Unit trusts in the Low Equity sector are limited to a maximum exposure of 40% in equity and 25% in property.

The Sharenet BCI Stable fund and Sharenet BCI Conservative FoF are both classified in the SA Multi-Asset Low Equity sector.

Income – Unit trusts in the Income sector are limited to only 10% equity and 25% property exposure.

The Sharenet BCI Income Plus fund is classified in the SA Multi-Asset Income sector.

Target Date – Unit trusts in this sector have a target date and the asset mix of the portfolio changes as the target date approaches. An investor looking to retire on a certain date could invest in a portfolio with a target date close to the date of retirement. Fund in this category cannot be compared as they would have differing target dates and asset splits.

Interest Bearing portfolios

Unit trusts in this category invest exclusively in bond, money market instruments and other interest-earning instruments. Equity and portfolio investments are excluded in this category. There are 3 sub-categories of interest-bearing portfolios.

Variable Term; Short Term and Money Market.

Real Estate portfolios

Invest at least 80% in listed property shares, property loan stock and real estate investment trusts (REITS).

The Sharenet BCI Property fund is classified in the SA Real Estate General sector.

To sum it all up. A portfolio that satisfies the limits of a global portfolio, as well as a real estate portfolio, will be classified in the Global Real Estate General sector. Similarly, you can find a portfolio classified in the Worldwide Multi-Asset Flexible sector or the South Africa Multi-Asset Flexible sector if more than 75% of its assets lies in SA. The fund categories provide for more meaningful comparison between portfolios to assess fund managers relative to their competition.