So you’re the average small unit trust investor, the type of person who has been putting away a few hundred rand a month, typically into a general equity unit trust, ever since you’ve been earning a decent salary.
Until the stock market crashed early last year you were quite happy with your investment. The Johannesburg Stock Exchange’s (JSE’s) long bull run meant steady growth in your money so, despite the proliferation of new products on the market, you remained well satisfied with tucking some money into a general equity fund each month.
Then along came the market crash. Like a number of professional investors, you didn’t see it coming and didn’t react – watching the value of your nest egg shrink by the week was as sobering as a cold shower on a winter morning.
Now you have become far more critical of general equity unit trusts. The stock market has come back fairly substantially so far this year and your investment is again growing, but you are starting to question the returns. Should you stay with your general equity fund, or start looking around for alternatives?
There are thousands, probably hundreds of thousands, of small investors asking that question right now. General equity funds have been getting bad press for, among other reasons, being too large and unfocussed. A bland look at recent returns is not encouraging. With 40 general equity funds presently available, the range of returns is diverse, perhaps so diverse as to suggest that some fund managers are taking fairly big risks with your money, while others are being far too cautious, or just plain incompetent.
The relatively new Allan Gray equity fund has been a stunning performer, leading the rolling Micropal ranking over the past three and six months with returns of 30% and 65% respectively. Be happy if you’re with them. But conventional wisdom says you shouldn’t chase the top performing fund – there are switching costs if you divest out of your current fund, and no fund can stay on top for too long.
Most people who have been investing in unit trusts for some time, typically through a monthly debit order, will be in one of the older funds. Some of the returns here are uninspiring.
GuardBank Growth, though it offered a positive return of 9% over the past three months and 31% over six months, produced a negative 8,5% over the past year and negative 6% over three years. NIB Syfrets Growth has been worse over the longer-term, returning a negative 24,5% over the past year and negative 11% over three years. Standard Bank Growth is a negative 22% over a year and negative 7% over three years.
But before making an indignant call to your financial advisor, consider what some of the experts are saying about prospects for value shares, the old traditional blue chips, and growth shares. A number of market commentators are upbeat about prospects for the JSE over the next one to two years – there might still be potential in some of the older general equity unit trusts, which typically have a large weighting toward these shares.
Peter Linley, head of Old Mutual Unit Trusts, believes now is the time to be investing in growth shares. “While value shares have outperformed growth shares over the past 12 months, growth shares are expected to outperform in the later part of the cycle,” Linley says. “The switch from growth to value investing is happening globally and is not specific to the JSE.”
His view is partly based on expectations of further interest rate cuts, which Linley believes will see the prime rate down to 16% from its current 19% by the end of the year. This will boost all classes of investments, though he believes equities will outperform bonds and certainly cash in the current cycle.
Even so, there will still be some general equity laggards, even under more favourable fundamental conditions. How do you decide if you are in one of these, and what are the options?
Laurie Buxton, client director at Plexus Asset Management, says her company looks for general equity funds that are clearly focused. “Some general equity funds are invested in too many shares. As a general rule of thumb we don’t like to see more than about 30 counters in a fund – that at least means the fund manager has a definite view on the market.”
Her advice to investors, who feel their general fund has been consistently underperforming, is to take a hard look at the underlying portfolio. If it seems too diverse – or if there have been no obvious attempts to restructure the portfolio in line with changing investment and economic conditions – consider switching to a more focused general equity fund.
If your monthly investment limit is below about R500, Buxton says investors might also consider a fund of funds, which has the advantage of multi-management.
Wrap funds are her favoured choice because they offer unbiased fund selection and less regulatory restrictions, but in most cases a minimum monthly investment of R500 or more will be required.
If you want to switch out of your present fund but remain with a general equity unit trust, look for consistency rather than the top performer of the quarter. Funds like the Brait Accelerated Growth, Coronation High Growth, Nedbank Growth, NIB Syfrets Prime Select and Sage Fund have consistently been around the top quartile over long periods – there are no doubt others too, but these are the types of general equity funds to look at.
Finally, don’t be misled by the quarterly results. Rather than investment in performance, look at the fund manager and research team behind the unit trust.
That’s the most solid basis for making an investment decision on an individual fund.