David le Page
Economists are not as a rule reluctant to be quoted, but the subject of personal investment in unit trusts induces unusual reticence.
This is largely due to their being advisers to the managers of those funds. The fund managers would be irked to have their doubts confirmed by their paid gurus. After all, much of the value of many financial instruments rests only on faith. And unit trusts must attract investors, working on faith, before they can function. So pseudonyms were requested.
Jumpy, who has bought into unit trusts with an offshore component from Momentum Advisory Services, considers them a useful rand hedge, but he is concerned that they very often underperform the market indices.
Jumpy likes the Momentum products because it’s easy to chop and change between them. He believes unit trusts should perform at least an index tracking function in a diversified portfolio, but local unit trusts cannot be relied upon to do this.
Why? Local fund managers are easily dazzled by blue chips, says Jumpy, and do not take full advantage of the cyclical nature of the markets, where different sectors perform well at different times.
At the moment, commodities are doing well after a lengthy honeymoon for financials. Jumpy expects disillusioned investors will soon be moving from the broader-based products into higher-risk, sector-specific funds.
Leading the regiment from behind is The Major General, who doesn’t have any unit trust investments himself, and does not plan to buy any, but believes they deserve closer attention from investors.
Bullish about the economy, The Major General says South Africa is about to enter a five- year period of growth unlike anything seen in the past two decades, and he believes that unit trusts are going to be an excellent way of riding the equities wave.
The Major General believes ordinary savers are turning away from insurance policies and towards unit trusts as a long-term savings vehicle. This is an essentially sound move, he says, if one considers that in the long term equities outperform all other kinds of investment.
This presumes, however, that the unfortunate saver does not pick a unit trust because it happens to be managed by his or her bank and is the easiest choice, as some unit trusts are underperforming as an ordinary savings account.
Unlike Jumpy, who is happy if his unit trusts’ growth matches the indices, Withdrawn feels it is a pretty poor show if they cannot outperform the market as a whole. That does not mean they don’t still have a place. “As a vehicle for small investors, I think they’re the only choice,” he says. But given the market’s recent instability, Withdrawn prefers to make brief, ad hoc forays into equities, and holds a lot of cash. Withdrawn warns, though, against choosing a product that is over-focused on a particular market sector.
In the late 1970s and early 1980s, he points out, anyone investing in property would have made a killing. In the 1990s, property is a dead loss.
Concerned by the movements of the national economy, Detached does not feel he has time to worry about managing a personal portfolio, and leaves it to specialists in his bank.
Some of Detached’s funds are in international equity trusts and gilt funds, and he is satisfied with them.
Unit trusts, says Detached, make sense for people who don’t have time to stock-pick. He does not have strong feelings about unit trusts as an instrument, but points to their value in cushioning small investors from damage suffered by any single stock.
What then, are the conclusions of Jumpy, Withdrawn, Detached and The Major General? If you don’t have the time or money to become a specialist investor, go ahead and use unit trusts.
When investing, choose at least two or three products, preferably all with an international equity component. Look at the markets to see which sectors are performing well, and on that basis choose a high-risk, medium-term specialist fund or funds. Then balance that out with broader-based funds.
Try and find institutions that offer maximum flexibility and minimum charges. And if considering your portfolio makes you feel jumpy, detached or withdrawn, rather than simply elated, remember you’re in good company.