Unit Trusts Explained! Investment is not just a financial decision; it’s a step towards securing your future. While there are multiple avenues for investment, one of the most popular option is Unit Trusts. This article aims to shed light on this versatile investment vehicle and specifically focus on the best-performing unit trusts in the ASISA category known as ‘South African Equities General.’ This category of funds often serve as the building blocks for the equity allocations we find in our various retirement fund assets, whether it be pension funds, retirement annuities etc, even if we’re not investing in them directly. And without sufficient exposure to ‘growth assets’ like equities in a portfolio, achieving our long-term financial and lifestyle goals is impossible. Finding any kind of comparative analysis is also extremely difficult (even as professionals in the industry) – so we have used Morningstar data to try and parse the information and come to some conclusions we hope will be helpful.
Unit Trusts Explained
Unit Trusts pool money from various investors to purchase a diversified portfolio of assets. Managed by professional fund managers, these investment vehicles offer the advantage of diversification even with a small investment amount. Unlike individual stocks or bonds, a unit trust provides exposure to a range of assets, managed by professionals, thereby mitigating risk and potentially increasing returns.
When you invest in a Unit Trust, you’re essentially buying ‘units’ of a larger investment portfolio. The value of these units will rise and fall based on the performance of the underlying assets. Investing in Unit Trusts offers several benefits like risk mitigation through diversification, professional management, and ease of trading. However, it’s crucial to understand that all investments come with risks, and past performance is not indicative of future results.
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Most unit trusts are actively managed by professional fund managers who decide what underlying instruments (shares, bonds etc.) to buy and sell – to hopefully maximise the potential returns while minimising the relative risks. In the last decade or so, index funds, or passively managed unit trusts – which track underlying indices have become increasingly popular due to their lower cost structure.
The Importance of Equities as an Asset Class
Equities are a cornerstone and key building block in most investment portfolios. Without them, achieving long-term inflation beating returns is almost impossible. Their compounding potential and ability to provide real returns make them indispensable for long-term financial planning. Equities offer diversification, liquidity, and the potential for high returns, making them ideal for achieving various financial and lifestyle goals. While they come with higher volatility, the risk is often justified by the reward, especially for long-term investors. Discover why an Understanding of the Psychology of Investing can ultimately help you become a more successful investor.
Unit Trust Examples
Unit Trusts come in various flavours—equity funds, bond funds, money market funds, and multi-asset funds, to name a few. These categories of unit trust funds (as defined by ASISA) allow for funds that have similar investment mandates and objectives to be compared to their peers. In South Africa, some well-known equity unit trusts include the Allan Gray Equity Fund, Coronation Top 20 Fund, and the Investec Equity Fund, among others.
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Best Performing Unit Trusts - South African Equities:
Before we begin, let’s just make our criteria for inclusion clear in terms of how we define ‘best performing.’ All we’ve done is look at annualised return figures, without considering volatility and other measures of risk to determine the real skill a fund manager is adding. So just because a fund ranks among the best performing, doesn’t mean you should invest in it. But it at least provides a starting point for further research. And the other thing we’ve done, is aim to find the ‘retail class’ of funds (those that typically have the highest fee structure and which you and I would pay if we invested in the find directly).
We don’t necessarily think a 3-year time frame is long enough to really judge the quality of a fund because over a shorter time frame luck – and simply being a fund that invests in sectors that are in favour over that period (e.g. resources) – can give a false sense of a portfolio managers true ability. Interesting to note however, how the top names are a mix of well-known institutional names (e.g. Investec and PSG), as well as what we think of a more boutique names (e.g. Aylett and Fairtree).
The Investec Dynamic Equity Fund continues to lead the way after 5 years and with it’s annualised return of over 15% p.a. means you would have doubled your money in that time frame. Isn’t hindsight wonderful! The rest of the names are faily closely bunched with Fairtree showing up again. One of the skills of constructing a portfolio is also how to blend different funds together because equity funds might have different mandates and styles (e.g., growth, value, momentum, quality) – which is beyond the scope of discussion here but important to consider nonetheless.
Fairtee has been widely regarded as the best equity manager in South Africa for a while now, with it’s fund found as a core holding in many institutional and discretionary mandates. Truffle is another boutique manager that has produced strong results for a long time and become a widely used fund manager by many institutions. The Merchant West Value Fund managed by Piet Viljoen shows up consistently as one of the best performing funds over 5-and-10 years as well.
How to Invest: The Value of Advice
Investing in Unit Trusts is straightforward. You can either invest a lump sum or opt for a monthly debit order. And while considering past performance is always one criteria for investment, understanding your goals and ambitions and constructing a portfolio to suit that is far more important. Working with a professional who can then build a portfolio customised to your needs is far more likely to help you achieve what matters to you. Because chasing returns based on what went before will inevitably lead to disappointment. If it were that easy everyone would be rich.
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Conclusion
Because finding any kind of comparitive performance of unit trusts is so difficult, we have tried to provide a starting point via this article, looking at unit trusts that fall into the SA Equities General category. At Henceforward, we understand that building an investment portfolio to suit a client’s needs, risk tolerance and goals, is far more complex than simply looking at past performance figures. But we still like to keep an eye out for funds that perform consistently well over time, and whether they are worth considering for our client portfolios.
Carl-Peter Lehmann
Carl-Peter is an Investment Professional and Certified Financial Planner with more than 20 years experience. Helping clients construct investment portfolios to achieve their goals is something he is extremely passionate about.
