For the determined investor, there is more than one way to push the limit, reports Shaun Harris
The capping of yet another global unit trust fund this week – this time Old Mutual’s recently launched Global Technology Fund – underscores the asset swap limitations being faced by unit trust management companies.
Under current Reserve Bank regulations offshore asset swaps are limited to 15% of a company’s local assets, a ceiling already reached by a number of unit trust management companies. So as South African investors flex their new-found international freedom and realise that any diversified investment portfolio should have significant offshore exposure, the unit trust bridges to global investments are closing faster than post office counters at tea time.
But there is a nice irony in the closure of Old Mutual’s R320-million unit trust fund this week, launched only 10 weeks ago and which was attracting funds of around R4- million a day, an irony that also points to an alternative path for individuals who want to invest overseas.
Run by the same Old Mutual Asset Management and even the same fund manager, Bruce Grater, is a World Technology Fund that is fully invested offshore and open to business. The fund also still has ample asset swap capacity, says Old Mutual Investment Frontiers marketing manager Marius Wentzel.
The difference between the funds is that the World Technology Fund is part of Investment Frontiers’s range of insurance fund products, and therefore not subjected to the limitations of the Unit Trust Control Act. Because it falls under the life company it is able to feed off a far larger balance sheet and does not face the same asset swap restrictions as the global unit trust funds.
There are presently four groups of insurance company funds with prices quoted daily in the press and on the Internet – Old Mutual Investment Frontiers, Fedsure/Norwich Future Select, Sanlam Stratus, and Cortal Direct, a joint venture between French bank subsidiary Cortal and Absa.
With pressure on global unit trusts, the insurance funds are becoming popular as a means of investing money offshore without eating into the individual R500 000 foreign exchange allowance. There are other benefits, and perhaps disadvantages, as well.
Most important is that while the insurance funds are currently an attractive route offshore, that should not be the overriding reason for investing in them. They are more specific to an investor’s particular needs and profile than unit trusts, and are certainly not a short-term investment.
Endowment has become an unpopular word in the insurance industry, a reflection of the often rigid, poorly performing policies of yesteryear. Wentzel does not even use the term, calling the Investment Frontiers products “structured investment portfolios” instead. But endowments are basically what they are, used as a wrapper for the underlying investment portfolios. The difference is these endowments have come a long way from the bad old days, refined and made more flexible so that, used intelligently, they do offer an interesting alternative to unit trusts in certain cases.
Apart from the ability to be fully invested offshore – free of unit trust regulations there is no required cash holding or limits on the exposure to individual equities – insurance funds offer attractive tax benefits.
If held for the full term, usually five years, the investment is taxed under the Insurance Act four-fund approach, which is at 30%, rather than the 45% most individual investors forfeit to the taxman. The insurance company settles the tax on the fund so the investor does not really feel the pain, receiving the final pay-out in after- tax money.
What has put investors off insurance funds in the past is the restriction of having capital tied up for five years. But the companies have become innovative, with most insurance fund products offering interest- free loans equal to the initial sum invested and part of the growth as long as it remains within the 20% rule applicable to the funds. So while the investment should at least be seen as medium term, part of the fund can be accessed earlier through the loan facility without disinvestment or part disinvestment.
Costs are roughly in line with unit trust investments, though some companies do amortise an initial fee over the life of the investment, ranging between 3% to 7%, that is not always disclosed to investors. Full disclosure, however, is made by the larger, more reputable companies.
Insurance funds are also well suited to effective retirement planning, particularly if used in conjunction with retirement annuities. The products may not find favour with all investors, and the funds required are fairly substantial – in the case of Investment Frontiers, R1 000 a month or a lump sum of R30 000; or Sanlam Stratus, a single-premium endowment, a minimum investment of about R11 000. But there is more going for insurance funds than simply a means of investing offshore.