Shaun Harris
This is the first quarter that the local unit trust industry has operated under its new classification system, introduced because the rapid growth of new funds was quickly making the old system outdated and to get South African funds in line with international markets, particularly that of the United States.
Overall, the new system seems to be getting a broad thumbs up – unit trust management companies and financial advisers say it offers investors more exact comparisons of different funds and their performance.
And though still to be enforced, the move by the Association of Unit Trusts, which aims to ensure that fund managers and companies stick to its mandates (and the threat of reclassification and the loss of performance history if they don’t comply), has been welcomed -the risk profiles of investors can be more closely matched to funds.
Carey Millerd, head of Nedcor Investment Bank (NIB) Unit Trusts, says the reclassification has made it easier for investors to understand the specific investment mechanics of their unit trusts.
He says the main spin-off of the exercise is that the South African investment community is finally becoming more aware of the pros and cons of risk relative to differing investment mandates and styles, and the need to strike a balance between the appropriate risk and desired reward.
In earlier years there was something of a Wild West attitude displayed by fund managers towards investing. Though funds were listed under broad categories, the manager could throw just about what they liked into the fund as they chased performance. Often they got it right, but sticking to a clearly defined mandate came second in the process.
Carmen Maynard, Liberty Life director and MD of Liberty Asset Management, says when there were a large number of general equity funds – all promising top quartile performance – by definition three out four fund managers had to be wrong.
Now funds are separated out and comparisons can be more exact. Performance should be judged according to the stated mandate and benchmark, and by how closely the fund reflects the risk profile of the investor.
Millerd says until recently few investors understood the concepts of risk or style and theme of management and the role these play in making or breaking investment returns. ”Most people tended to think they could simply look for absolute returns on the understanding that the ups and downs of volatility and market cycles would eventually cancel each other out.
”While this may have been the case for the investor and broadly based unit trusts a few years back, increasing globalisation and specialisation has led to new levels of volatility and uncertainty in terms of overall returns – and even loss of capital invested.”
The key between risk and reward, he says, lies in reaching a balance between the two where the investor is comfortable with the risk and confident that the chosen investments will assist in attaining investment goals.
Millerd adds that the new classification system will enable investors and financial advisers to keep close tabs on their unit trust fund and ensure that the fund manager is within their defined risk and mandate parameters.
NIB used the reclassification to make some significant changes to its funds. The Syfrets name has been dropped from the unit trusts, and several funds have been reallocated to more appropriate sectors, including the NIB Growth Fund, the NIB Financial Opportunities Fund and the NIB Intellectual Capital Fund.