The world of saving and investing is confusing at the best of times. But you really need your wits about you when considering an investment in one of the 950-plus unit trust funds on offer in the South African Collective Investment Schemes industry.
If you plan to go-it-alone you need a solid understanding of both asset classes and risk and return. There are unit trusts funds that satisfy any combination of these key concepts. You must also consider the investment philosophy of your preferred asset management firm.
"An investment philosophy is a set of principles that inform and outline the investment decision-making process of the portfolio manager," says Candice Paine, head of retail at Sanlam Investment Management. Local investors can choose from a number of asset management firms that rely on investment philosophies to differentiate their product offering.
Mike Ronald, head of the investment team at Marriott Asset Management, observes that these philosophies are subject to the ebb and flow of business and investment cycles. Although most asset managers go through periods when their investment "style" is effective they tend to struggle with consistency.
An investment philosophy can help you to choose between one asset manager and the next. "There are several theories and philosophical approaches that guide asset management decisions and they each have their own merits," says Kwaku Koranteng, account manager at Investment Solutions.
You can get a feel for an asset manager's philosophy by considering the category a unit trust is listed under as well as the fund fact sheet, which is provided by the asset management firm to spell out the fund's investment objectives.
Most asset managers in the equity unit trust fund space make use of active management strategies that require them to make frequent buy and sell decisions in order to outperform a pre-defined benchmark. They will "pick" a basket of companies to beat the JSE All Share or JSE Top 40 Share index, for example.
"Some asset managers like to buy investments that they think are undervalued in the anticipation that the value of the investment will grow as other buyers of the investment realise its true value," says Ronald. This style is known as value investing. He explains growth investing as a manager strategy that prefers companies that are likely to grow their earnings faster than others. "Whether an asset manager follows a growth or a value investing strategy, they will want to buy shares at the bottom and sell at the top," he concludes.
For more conservative investors, late in their life stages, income focused investing makes sense. An income-focused asset management firm chooses investments that are likely to provide a reliable and growing income and where the price of the income stream is below average.
Your preferred asset management philosophy will depend on your risk appetite. If you are a conservative investor you might favour unit trusts in the fixed interest space, but specialist equity unit trusts will satisfy- those with a more aggressive risk appetite.
Nowadays most investors defer the asset allocation decision to the asset management firm. Instead of worrying about whether to invest in fixed income or equity unit trusts you can simply purchase units in asset allocation funds. The fund managers of these funds continuously monitor the investment environment and determine the optimum mix of asset classes.