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Today's savings vehicle

The launch of unit trust funds in South Africa in the mid-Sixties opened up a new channel for investors, allowing them to get a decent, diversified spread of blue chip shares at an affordable price (the first unit trusts were only invested in equities).

Apart from wealthy investors, few people with an interest in the stock market could afford to buy a large portfolio of shares directly: the introduction of unit trusts allowed them to gain that exposure.

It wasn’t only investors per se who were attracted to unit trusts but anybody who wanted to get a decent return on their savings.

Unit trusts give higher returns

It wasn’t hard to see that buying unit trusts gave you a much higher return than money in the bank or an endowment policy.

And for a large part of the Sixties the JSE was in a strong and steady bull run.

But in 1969 South African investors learned an important lesson about equities: prices go up and down.

The market crashed and it took close to a decade to return to the 1969 peak.

That nearly wiped out the unit trust industry.

But it survived and is currently thriving, popular with investors and savers for a number of reasons discussed below.

Unit trusts are becoming the dominant way that people save, says Pieter Koekemoer, who heads retail investing at Coronation Fund Managers.

Why invest in unit trusts?

Koekemoer lists three reasons for unit trusts being attractive investment options.

“Unit trusts are transparent and regulated," he said. "It’s an industry where – as a fundamental principle – investors need to know where their money is deployed and what to expect.”

Related to that is the access or liquidity of unit trusts, he said.

“The assets always remain the assets of the third party. Though we emphasise the importance to taking a long-term view, if the investor wants his money he can get it within 24 hours."

"The third reason is competition. With the industry being so transparent you can see its performance all the time, even on a daily basis.”

Claude van Cuyck, head of equities at Sanlam Investment Management (SIM), agrees liquidity is one of the attractions of unit trusts.

To that he adds costs: cheaper than a stockbroker, with many firms offering the same benefits of first class research and the all-important skill of the fund manager.

“If the investor chooses the right home they’ll probably stick with it for a long time," said Cuyck. "Ultimately, you’re getting a broad range of products through unit trusts – the investment is spread."

"If you choose the right manager you’ll get the long-term returns.”

He’s critical of the “ridiculous costs” of switching funds and says investment advisers are often to blame for churning client portfolios to earn additional fees.

Long-term view

“Once a person has done the proper due diligence on the investment home and manager, stick with it."

"One must take a long-term view. If the adviser wants you to switch you need to ask serious questions as to why.”

While liquidity is an advantage of unit trusts it can also be a downfall, allowing investors to pull out, often for the wrong reasons.

Reports on the pages that follow stress the importance of a long-term approach to unit trust investing.

Apart from helping the investor through market cycles it also allows the creation of wealth through the compounding of interest earned on income and dividends reinvested.


 - Finweek

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