Wally Lambert
As stock markets across the globe continue to react with no apparent logic to troubles in the East, there are few investors who haven’t considered cashing in their unit trusts for a holiday destination where nobody’s heard of “Asian flu”.
Others will be looking to their “friendly” financial advisers while scouring the economic updates sent out by unit-trust management companies in an attempt to decide whether to get out of the stock market or into something else.
In unit-trust investors’ terms, this often implies a switch from one unit trust to another — for example out of an aggressive fund into a conservative one — or from a general equity fund into a money-market or income fund. The problems are timing and cost.
As TMA Investments Product Services marketing assistant Paul Manson points out, if a fund manager, who is paid thousands of rands a year to watch the market, can’t foresee a crash in Asia, it might be a little tricky for the man in the street to do a better job.
It is no mean feat to be able to see market corrections before they happen, to adjust quickly to changing market conditions and to contain a seemingly dangerous situation, but that is precisely what a fund manager is paid to do. It’s what the unit-trust investor pays for when investing through a unit-trust management company.
“One has to question the effectiveness of changing from a general to income fund or between fund groups simply because of the timing issue. Where it does work well is where a client’s investment perspective, or risk profile, has changed completely.”
Old Mutual Unit Trusts’ Di Turpin agrees that it probably doesn’t pay to switch between management companies. “As a theoretical exercise it’s great, but it’s all about timing and being able to tell when a fund, or the market, has become expensive.
“The decision to switch from an equity to an income fund in order to protect one’s capital value should not be taken without an in-depth knowledge of the stock market. If the investor incorrectly reads the market as overvalued in a particular sector, switches could result in a loss on potential returns. However, if the client is genuinely concerned about the state of the market, we suggest it is then appropriate to switch into, for example, our Income Fund. Other cases where switching is appropriate are if the client’s lifestyle or financial circumstances change …”
An Old Mutual Unit Trusts calculation which compares the returns of an investor who invested R10 000 a year in the Old Mutual Investors’ Fund — a general equity fund — with someone who invested the same amount but switched at the end of each year to the best performing general equity fund, shows the investor who did not switch with R55 259 at the end of the period. The investor who switched would have only R49 338. Even more interesting, switching to the worst- performing equity fund at the end of each year would have produced R50 782.
Buying into a unit trust attracts charges which differ between management companies. Some companies do not expect an additional administration fee when clients switch between funds of the same asset class and within the same company, although some compulsory charges, for example a maximum 0,7% for equity funds and 0,05% for income and gilt funds, do apply. When moving from gilts to equities, however, there are additional costs, an average 4% charge. Unit-trust management companies say these fees “put all clients in the same situation, regardless of how they enter the equity market for the first time”.
Of course, switching between different fund management companies implies a greater charge, with the investor in effect cashing in units at one institution and having to pay all the applicable first-time fees when joining the new company.
Linked-product companies like TMA allow investors to alter or change their underlying asset composition at zero cost for switches within a fund group and a 0,25% charge for switches between different fund-management companies, although their up-front fee structure is different. In effect, there’s a built-in charge.
The bottom line: it is unlikely that the man in the street will be able to outfox the market or the fund manager. Treat switching with caution.