Tag Archives: Financial Markets

Views – Your Questions Answered

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Q: Have you saved enough for retirement? Generating a passive income should get you retiring comfortably.

A: Passive income is the fruits of investments you have made that pay you a recurring income, without decreasing the value of the investments. In a perfect world these investments would keep paying you forever. Sounds beautiful, right?

In reality, building a sizable passive income stream takes a phenomenal amount of hard work, timing, business acumen, investment savvy, fortune and most importantly: time. The point I’m making is that if you want to be able to retire one day, you better get investing ASAP.

Read more here: The Basics Of Wealth Part 2

Source: Ricki Allardice, Sharenet Wealth Manager

Need advice or guidance on investments best suited for your needs? Contact our Wealth division, for a free consultation.

wealth@sharenet.co.za

Graphonomics

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On the 30th January 2018, fund managers Viceroy, who exposed accounting fraud in Steinhoff last year, published a report on Capitec, describing the company as a “loan shark with massively understated defaults – masquerading as a community finance provider”. The share price plunged to a low of R705.00 on the day, but closed at R915.92.

Graph: Capitec’s performance from 26th January to the morning of the 31st, showing the plunge following the release of the Viceroy report on the 30th. Note how the share price was already on the decline a few days before, suggesting some already knew about the pending report. (Graph source: Sharenet)

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What is cryptocurrency and should I invest in it?

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Q: What is cryptocurrency and should I invest in it?

A: A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.

If you are considering investing in cryptocurrencies, it may be best to treat your “investment” in the same way you would treat any other highly speculative venture. In other words, recognise that you run the risk of losing most of your investment, if not all of it.
 

Source: Investopia

Want to follow the Crypto trend? We’ve got you covered: Check out the main crypto spots now available on our free mobile app (http://www.sharenet.co.za/v3/app.php), spots page (http://www.sharenet.co.za/v3/spot.php) and charts/news on our crypto page(http://www.sharenet.co.za/v3/crypto.php).

Need advice or guidance on on investments best suited for your needs? Contact our Wealth division, for a free consultation.

wealth@sharenet.co.za

Did You Know?

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Institutional investors on their way to investing in Bitcoin

CME Group, the world’s leading derivatives marketplace, is planning to offer futures on Bitcoins by the end of 2017. The contracts will most likely be settled in cash, and will make use of a daily price from the CME CF Bitcoin reference rate.

Bitcoin futures would allow professional investors exposure to Bitcoin’s volatility, as well as the opportunity to trade the futures on regulated venues and use them as a hedging tool.

The Markets As We See Them

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Dear Readers

Welcome to the November issue of the Views newsletter.

While the year is rapidly drawing to a close and “crazy busy” seems an understatement, can I encourage you to steal away for a few moments and be absorbed by something other than your usual day-to-day routine.

Our first article on offer here is by AJ Cilliers, and is a follow-up to his previous piece highlighting the bright future of the super computer in the investing space. The good news is that humans have not made themselves obsolete quite yet, with some interesting research on just how much more successful some fund managers are than computers when it comes to selecting winning shares. You’ll also find tips on how to apply their strategies to your own investment decisions.

How Fund Managers Beat The Computers

20 October 2017 | AJ Cilliers

AJ Cilliers’ companion piece to Will Your Next Fund Manager Be A Super Computer? While computers seem to be better at share trading than humans, share picking remains best done by humans. Find out why…

Read more >

Moving on to the commodities arena, Wim Prinsloo investigates the progress of the electric vehicle revolution, and discovers the looming shift in the demand for commodities for use in batteries and vehicle bodies. Platinum, for one, may not be as much of a ‘precious’ metal in the near future. Don’t be asleep for this, as most of us were for the entrance of Microsoft and computers – you can’t afford to miss it!

The EV Revolution: Which Commodities Will Be The Winners And Losers?

17 October 2017 | Wim Prinsloo

Government support for tighter emission targets is necessitating a faster move towards electric vehicles (EVs) than previously anticipated. Not only will this have far-reaching implications for the global vehicle industry, it will also impact a number of commodity markets over the long-run.

Read more >

Finally, on a more personal note, Nicole Cameron interviews Kim Potgieter on her career as a financial planner. If you’ve ever been curious about making a change into this career and where it can take you, this article will inspire you. A woman passionate about supporting other women in the financial services industry, find out what drives Kim and discover her ingredients for success and happiness at work.

FEMMES in FINANCE: Meet Kim Potgieter, Head of Financial Life Planning at Chartered Wealth Solutions

27 October 2017 | Nicole Cameron

Kim is an authority on financial life planning and helps clients gain a holistic approach towards making healthy money-related decisions.

Read more >

The Simplest Way To Invest

3 November 2017 | Kobus Louw

You only have to consider these four funds for a long-term investment. We have made investments simple by narrowing down the choice to only four funds. You can choose between a conservative, a moderate and an aggressive fund, each fund designed for long-term investors with a specific risk profile in mind.

Read more >

Wishing you good reading and a successful month on the markets,

Natalie Mayer

Editor

editor@sharenet.co.za

Your Questions Answered

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Q:

What is a unit trust fund and how does it work?

A:

Simply put, a unit trust fund is a way for you to invest your money.  You can invest in a unit trust fund through financial services providers such as a broker; an Investment Management Company or in some cases through your bank. A unit trust fund is a pooled resource, which means that it allows a group of investors to combine their cash and invest it.  Think of it like going in on a group gift. Taken altogether, those investments are called the fund’s assets.

So how does it work?

A unit trust fund is made up of equal shares which are called “units”; these “units” have a price called a Net Asset Value. While you as an individual invest in a unit trust fund, the fund itself is run by a fund manager, whose aim is to grow the overall value of unit trust fund.  The fund manager does this by investing the fund’s assets, usually by buying stocks, bonds, or a combination of these two securities which are listed on the Stock Exchange. These stocks or bonds are often referred to as a fund’s “holdings” and all of a fund’s holdings together are its “portfolio.”

A fund’s type depends on the kinds of securities it holds. For example, a small-company stock fund invests in the stocks of small companies. What you get as an investor or shareholder is a portion of that portfolio. Regardless of how much or how little you invest, your shares are the portfolio in miniature.

Source: Morningstar

It is never too early to start investing, but it is also never too late. At Sharenet, we offer a wide range of investing opportunities and will help you tailor your portfolio to your needs.

Visit www.sharenetinvestments.co.za for more information or contact our investment team on investments@sharenet.co.za.

Got an investing question? Ask our friendly Financial Services Advisor

Email: editor@sharenet.co.za

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.

Fund of Funds

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Fund of funds (FoF) are unit trusts that invest in other unit trusts managed by different fund managers. Fund of funds are often referred to as multi-manager funds due to the fund’s exposure to multiple fund managers. The manager of the FoF selects the underlying funds and manages the asset allocation of the FoF. Investors are often sceptic about the value added by FoF managers that can justify the extra layer of management fees on top of the management fees from the underlying investments. The reality is that an excellent FoF manager can add value in many areas.

Asset Allocation

The FoF manager monitors the asset allocation of the fund daily to ensure the fund is well positioned for prevailing market conditions. The manager will for instance increase exposure to equity when expecting the asset class to outperform. Not all FoF managers actively manage the asset allocation, but those that do are usually experts in moving capital across asset classes. FoF managers can also select the best fund managers within each asset class. An asset management company that is excellent in managing equity funds, may not have the same level of expertise in managing fixed income funds. Combining funds this way may be out of reach for certain investors due to high minimum investment amounts. An investor can hence access the best of breed managers in each asset class by investing in a FoF.

Manager Selection

FoF managers have systems and processes in place to conduct a thorough due diligence on fund managers considered for inclusion into the FoF. Analysing fund managers generally consists of two steps. The first being a quantitative analysis of the fund manager’s performance and investment style to determine if the fund is a viable option for inclusion into the FoF. The next step is an intensive due diligence into the fund manager and the investment team. This often includes a visit to the offices of the fund manager and completing a questionnaire on the company’s investment process. This should help the FoF manager make the best choice when comparing and selecting funds to invest in.

Investment Style Diversification

Adding multiple fund managers into a single fund provides diversification across asset classes and investment styles. Fund managers have unique investment styles that follow a certain approach/strategy. Differing strategies will respond differently to certain market conditions. That means an investment strategy (like value investing) might do well in one year but could underperform in the next due to changing market conditions. This is where diversification comes into play. By combining investment strategies, you can offset the negative impact of a certain kind of strategy during the different market cycles and increase the stability of your return.

Lower Underlying Manager Fees

Fund of funds has scale and a lot more assets under management than a retail investor. This means they are in a strong position to negotiate management fees of the underlying funds they invest in. Sometimes the fund that is being considered for inclusion into the FoF will have an institutional fee class that charges a lower management fee than the retail fee class. These institutional fee classes have high minimum investment amounts that are out of reach for retail investors. By utilising institutional fee classes, a fund of funds can significantly lower its cost (measured by the Total Expense Ratio or TER).

No Capital Gains Tax When Switching

Fund of funds can switch capital from one fund to another without triggering Capital Gains Tax (CGT). Retail investors, on the other hand, will need to pay CGT if they switch from one fund to another and there was a profit on the fund being sold. If the investor decides to rather invest in a fund of fund, then the only time the investor could be liable to pay CGT is when selling units of the fund of fund. That means you don’t have to be concerned about being in the wrong fund because switches within the fund of funds trigger no CGT. View our tax in unit trusts article for more details on the tax treatment of unit trusts.

Conclusion

Fund of funds can certainly add value to investors with the most prominent trade-off being the fees that are usually higher versus the increased stability of portfolio return. The scale that fund of funds has could reduce overall fees, meaning a smaller cost for all the additional benefits. Some of the benefits include diversification, especially for investors with a low investment amount, and strong selection that should deliver superior performance. There is also no capital gains tax for a FoF when switching between funds.

Sharenet Investments manages three fund of funds that are registered South African unit trusts. The Sharenet BCI Conservative FoF has low levels of equity for the conservative investor. The Sharenet BCI Moderate FoF has more exposure to equity than the Conservative fund and is suitable for investors with a moderate risk profile. For the more aggressive wealth seekers, there is the Sharenet BCI Aggressive FoF that can invest up to 75% in equity and aims to grow wealth over the long term.

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.