Choosing a unit trust

Choice is usually a good thing. The problem comes in when there are simply too many options muddying the waters. With approximately 1200 unit trust options available in South Africa, trying to decide which one is best can be overwhelming. The question is: how do you go about making the right choice?

“The unit trust market can be seriously complicated for the typical investor,” says Tracy Jenson, Chief Product Architect at 10X Investments. “To help simplify the process, it can be narrowed down to these three simple questions you need to ask yourself before investing.”

How long do I plan to invest for?

The investment term impacts dramatically on your choice of unit trust. If you’re looking to invest for a specific goal, over a specific time period (i.e. less than five years) you should consider a unit trust that invests predominately in cash and bonds.

“These funds are generally low to medium equity portfolios,” Jensen explains. “Over the short-term they reduce market fluctuations and are therefore less likely to lose you money. However, in the long-term they tend to give you a lower return on your investment.”

When investing for the long-term (i.e. 5 years or more), consider a unit trust that invests more heavily in property and shares – commonly known as a high equity portfolio. While a high equity portfolio has been proven to provide better returns over the long-term, they are subject to the volatility of the market and therefore are a higher risk investment choice over short periods.

Where am I going to get the best return on my investment?

The primary aim for investing money in a unit trust is to see it grow. The problem arises when people start making promises of returns that are based on guesswork. This leaves you with two options: do you put your faith in a fund manager and let them actively decide how your money is invested? Or, do you choose to go with a passive fund that tracks market performance?

“We all know who has done well in the past. The question is: do we know who will do well in the future? Sadly, there simply is no fool-proof method to predict these kind of results,” points out Jensen. “Empirical data does show that 3 out of 4 active funds have underperformed the market in the last 5 years[i]. Simply put – they have not kept pace with the average market growth and, by association, with passive funds.”

Do I really get what I’m paying?

The third and probably most important consideration is understanding how much you are paying in fees each month. In many industries, the more you pay the better the product – this couldn’t be further from the truth when it comes to investments. In fact, the research suggests the complete opposite.

According to the Global Fund Investor Experience 2015 report, low fees are the most consistent predictor of good investment performance. This might seem a little confusing, but consider the compound costs of fees: while 1% or 2% might seem very little now, the impact 10, 20 or 30 years down the line can be immense.

“An investor shouldn’t simply go out and pick the cheapest option on the market without considering the first two points discussed,” says Jensen. “Rather, the aim should be 1% or less in fees per year. This way the investor can ensure that fees are not eating into their share of the return.”

Investing money, or buying a unit trust, for the first time can be a daunting prospect. However, all the information you might need to answer the three questions above should come in what is called a minimum disclosure document.

This document should consist of the asset allocation, fees and management philosophy of each unit trust. If you have any doubts, you should always contact the investment company or visit their website for more information.

“A savings product like a unit trust is a perfect starting point for any investor,” she concludes.