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Cheaper trusts often better investments

Johannesburg - In the case of unit trusts high prices do not necessarily mean better quality.

An analysis to determine whether South African unit trusts with high total expense ratios (TERs) were better investments than those with low TERs found that the cheaper trusts were better investments.

Analysis of TERs and yields of South African unit trusts followed a similar investigation in the USA. The American investigation had found that trusts with lower TERs delivered the best yields.

Russel Kinnel, head of unit trust research at Morningstar in America, went so far as to say the TER was the strongest indicator of the return that a trust could produce.

In South Africa the investigation was conducted by Daniel Wessels of DRW Investment Research, and his findings were very similar.

The major difference between South Africa and the USA is that here TERs have been published only since 2007 and the data could not be analysed over as long a period. But there was little difference between the findings. Wessels’ conclusion was also that the average total yield (capital growth and reinvestment of yield) of unit trusts with the highest TERs was considerably lower than that of those with lower TERs.

Wessels said that investors would do themselves a favour if they avoided unit trusts with the highest TERs, simply because the returns did not justify the higher costs.

An investment in a trust with a lower TER offered a greater chance of a higher yield.

The analysis covered equity trusts including general, value and growth trusts, as well as asset-allocation trusts with low and moderate exposure to shares, and absolute-return trusts.

Equity trusts represented 80% of all investments in unit trusts if money-market trusts were excluded. There were 71 unit trusts in this category and the five with the lowest TERs achieved much better returns than those with high TERs.

The average TER of the five cheapest trusts was 0.72%, with a total yield of 21.35% between 2007 and 2009. This compared with the 2.97% average TER of the five most expensive trusts, with a total return of 10.88%.

If these unit trust were listed on the strength of yield, the average TER of the five trusts delivering the best return would be 1.61%, while that of the weakest performers would be higher at 1.74%, with a 4.88% return.

Wessels said although there were obvious differences between the yields of the trusts with the highest and lowest TERs, the findings did not inevitably indicate that trusts with lower TERs would always deliver a better yield than one with a high TER.

The management styles of the respective unit trusts also made a great difference to the TERs.

Wessels’ analysis showed that multimanaged trusts and funds of funds had much higher TERs, and returns did not necessarily justify these.

- Sake24

For business news in Afrikaans, go to Sake24.com.

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