Choosing a unit trust

There are hundreds of unit trusts to choose from and many investment firms are offering them. Angelique Ruzicka speaks to the experts to find out how you can go about choosing the right fund to invest in and asks whether past performance should be a consideration.

Last year there were 967 collective investment schemes from 44 companies to choose from according to the Association for Savings and Investment South Africa (ASISA). So how do you choose the right unit trust for your investment needs?

If you are choosing your own unit trust, it’s important to be clear on your investment objectives at the outset and understand the fund or suite of funds you’re planning to invest in says investment management firm Allan Gray. Committing to the investment is the next step because if you switch in and out of funds, it can destroy the value of your investment. “If you do your homework, you’re more likely to make the right decisions and remain committed over the long term,” explains Rob Formby, director of retail operations at Allan Gray.

Understand the fund’s investment objective
To make them easier to understand ASISA has stipulated that funds should be categorised. The categorisation process has recently been simplified even further and now all funds are classified according to their geographic exposure first and then by the type of asset they invest in.  Within each asset class there is a third tier which indicates the main investment focus.

If you want to know what the fund manager’s intentions are you can easily find that out by taking a look at the funds factsheet. This is a compulsory document fund managers need to make available each month and it’s usually found on the fund manager’s website says Formby. If it’s an equity fund, for example, its objective might be to outperform the South African equity market over the long term. The factsheet will also stipulate the fund’s benchmark, which provides a way of demonstrating whether or not the fund is achieving its objective.

Should you base your investment decision on past performance?
This question is often raised when it comes to deciding on which fund to go for. When it comes to answering this question there is often conflicting advice but generally commentators say that past performance should not be the only consideration. “Be very careful – past performance is no guarantee of future performance. I would argue that one-year returns are meaningless because one-year returns are mainly based on luck and possibly some timing. It’s not necessarily indicative of any skill. Some people may argue with that, but the reality is that over the short term it is primarily luck and timing,” says John Kinsley, MD of Prudential Unit Trusts.

If you want to judge the fund on past performance you need to look at how it has performed over five or ten years, believes Kinsley: “But as soon as you start to go out, particularly to five and ten year returns, it becomes far more meaningful because its shows a manager or an investment house that has most likely gone through a full up and down-cycle, if not a couple of cycles. If that manager is continuously in the upper quarter over that period, it tends to show that there is a well-tested investment process – and that’s the sort of manager that you want.”

Wynand Gouws, head of retail sales at Old Mutual Investment Group says that there are a number of factors you should consider when doing performance comparisons i.e. what were the market conditions, how do the funds compare over different market cycles and you should also find out if there have been changes to the investment team.  “The most important thing to have right is to be in the fund with the right mandate (objective) aligned to your objectives and goals,” he adds.

Following a star
Investors can also become ‘smitten’ with the star fund manager of the fund and if that star leaves the organisation some investors tend to jump ship with him or her. However, this isn’t always a good idea. “I would suggest getting an understanding of the process and team behind the particular fund. If the process and philosophy remains in place with a strong team to support the process, investors should not “knee-jerk” and stay invested to review delivery to the funds objectives or mandate,” says Gouws.

Is the timing right?
Lots of readers ask about when they should start investing. The answer is: now. “There is no such thing as the best time – the sooner you can start, the better. Even if you can put small amounts away then I think you should do so. The great thing about unit trusts is that they are so flexible. That’s why they suit somebody who may not have a regular cash flow because they are young or self-employed, but who can put little bits away when they can afford it. The unit trust account is great for that, whereas a regular savings plan via something like an endowment requires regular cash flow and they may not be prepared to commit to it,” says Kinsley.

Still confused? Ask an expert
Formby stresses that fund selection should always be based on individual objectives and circumstances. “The value of advice should not be underestimated and if you’re uncertain about which fund to use consider calling an independent adviser to assist in this process,” he says.

Gouws agrees that financial advice is important. “If you need help, partner with an accredited financial advisor to draw up a detailed financial plan. Unit trusts are the ideal vehicle to start investing in. Payments are flexible, there are no penalties and no contractual terms and you can start from R250-500 per month or with a R5, 000 single investment amount,” he says.