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Johannesburg - Unit trusts with exposure to offshore investments are not always what they are professed to be.
Many of the unit trusts presented as international or global unit trusts do not really offer the foreign diversification so highly vaunted in marketing.
Unit trusts investing overseas fall into three categories, namely foreign, international and global unit trusts.
Exposure to foreign investments depends on the rules for the various trusts.
The best way to get exposure to overseas shares is through foreign unit trusts.
There are 383 such trusts in which South Africans can invest, and they are offered by companies such as Allan Gray Orbis, Ashburton, and Franklin Templeton - as well as South African companies such as Investec, Stanlib, Prudential, Sanlam and Old Mutual.
These trusts are, however, very expensive, owing to complex and often vague structures, and the initial investment requirement can be as much as $1m.
The costs attached to trusts offered by South African companies overseas, in particular, are high. If they make the investments themselves and not through a foreign partner, the company bears the cost of running an office.
In cases where South African companies use a foreign partner, investors pay the fees of portfolio managers, stockbrokers and financial advisers, over and above the other costs of investing in a unit trust.
Performance fees are also levied if the yield exceeds a predetermined level. These can run to 2.5% of the investment.
The advantage of these unit trusts is that the eventual investment is available in the currency in which it is invested, and can be sold in the country in question.
Paul Theron, director of electronic broking firm Vestact, advises investors in foreign funds to determine which shares the funds invest in and what the investment costs.
Many of the unit trusts invest in obscure companies like manufacturers of electronic guitar parts.
Theron says investors can, with a little effort, invest directly in good foreign companies.
Walter Aylett, director of Aylett & Co, says it is often better for South African companies to use a portfolio manager in the country where the investments are made.
The advantage is that that management fees have to be contained and the yield is good enough to justify a performance fee.
In the case of international and global unit trusts, investors must acquaint themselves with the full extent of the exposure to foreign investments.
Restrictions
Because of the restrictions on the percentage of their assets under management that international unit trusts may invest offshore, they are often closed to new investments when the maximum permissible limit is reached.
If the unit trusts are closed to new investments, new funds are invested in South African assets or in shares offering a hedge against a weakening of the South African rand.
It also happens that money is invested in another South African unit trust until it is transferred to the international trust.
As in the case of global unit trusts, the ultimate yield on the trust is again sold in South African currency.
This offers a hedge against the value of the rand and fluctuations in the South African market, but it is not in the true sense of the word a foreign investment, says Allan Gray's Richard Carter.
Because there are no prescriptions for investments in global unit trusts, the major portion of a portfolio could be in South African shares.
The investment portfolio of one global unit trust at the end of June had a more than 48% exposure to South African shares like Altech, Naspers, MTN, Reunert, Vodacom and Telkom.
Managers of global unit trusts reckon that in the past year it has been to investors' advantage to invest in South African shares as the returns have been so much better. These investors were not completely exposed to foreign equities.
To make sure of what they are getting and what they are paying for, investors must carefully examine the underlying investments and cost structures of international and global unit trusts, advises Tri-Alpha director Cobus Kruger.
Many of these trusts are multi-managed unit trusts or funds of funds.
The idea behind multi-managed unit trusts is to use different portfolio managers for different investments.
But many multi-managed unit trusts simply invest in other unit trusts of that specific company, and the investor pays management fees on each underlying trust.
This can also be the case with funds of funds. They are touted as investments in which the best unit trust in that particular category is selected, but this is not always so. There are portfolio-managing companies whose fund of funds invests only in their own unit trusts.
This creates the impression that the portfolio is constructed to generate fees for the management company.
These portfolios have at least two tiers of costs.
The portfolio manager earns his management fee, and the managers of the underlying portfolios also receive their share for actually managing of the portfolio.
People investing in these trusts through a financial adviser pay additional adviser fees.
- Sake24.com
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