There are many with strong opinions about the merits of a share portfolio versus a unit trust portfolio. Here’s another one (strong opinion) in favour of a unit trust portfolio.
One of the aims of investing surely has to be to accumulate wealth which will enable you to live “comfortably” at a later stage in life (usually referred to as retirement). In this regard, it is my opinion that a unit trust portfolio trumps a share portfolio, every time!
A retiree’s primary aim is usually security of income and this is where a share portfolio falls short; it is very difficult to draw a regular income from a share portfolio. Investors usually have to depend on dividends which are irregular, sometimes unreliable and the long-term dividend yield is less than 3% (±2.8%). An investor with a share portfolio of R10m would therefore expect to receive less than R300k pa from the dividend yield. Alternately they would need to sell shares (CGT) and this is also tricky as many investors are emotionally tied to their investments.
The same amount in a unit trust portfolio could reasonably generate a sustainable (and close to tax-free) income of ±R500k pa (5%). This would be done by selling units on a monthly basis to provide the income – essentially rand-cost-averaging on the way out. Sure, this is a capital gains tax event but in most cases, this would be very tax efficient (if not completely tax-free). Most unit trust investors also have no idea of the underlying shares that they hold and the emotional attachment to “granny’s shares” is simply not there.
Today I got a call from a journalist asking a few questions about what a beginner investor should do if they want to start investing…I think that they were looking for “tips and tricks” about which funds or shares to choose…here was my reply.
The first bit of advice I would give them is to consult a Certified Financial Planner®. It will cost them but could well prove to be the best investment they make. At the very least, they need help identifying their savings and investment goals. Are they short, medium or long term? They are “beginner” investors after all.
My 2nd piece of advice is to stay away from insurance companies- don’t ever invest via one of them. They are expensive, inflexible, opaque with respect to fees and returns and there are penalties when you change your premium/mind – and you will need to change your premium because life happens!
Once they know why they are saving/investing then there is no reason that they cant do the rest on their own…and my advice is to use unit trusts.
Why unit trusts? I think that they are the ultimate savings and investment vehicles because they are:
- Accessible – you can invest from as little as R50 per month (and unlike many of the insurance products with low initial investment amounts, you wont pay 5-15% of premium each time you invest)!
- Diversified – for R50 you can get exposure to all of the shares on the JSE and for R200 pm you can own the top 2000 shares in the world.
- Cheap – in most instances there are no upfront admin fees and there are more than a few passive (tracker) funds with annual fees that are as low as 0.2% pa.
- Flexible – you can stop, restart, increase or decrease the premium without ever incurring penalties!
- Transparent – you can see the underlying investments and you can see all of the charges
- Tax efficient – any time a manager buys/sells shares you will not be subject to any capital gains tax. This only comes when you sell one day.
- Come in a variety of flavours – specialist equity to money market and you can get a tax-free account as well.
- There is a whole layer of legislative protection – you own units in a trust fund and this is highly regulated!
I was then asked for my 2nd and 3rd choice investments…my answer was “unit trusts and unit trusts”.
Yes, I am a huge fan of unit trusts and will remain so until someone comes up with a better idea.
I have written about the merits of using the unit trust versions of the SATRIX Funds previously but a recent example once again highlighted the advantage of the unit trust over the ETF.
Apart from the fact that the UT is cheaper than the ETF (the underlying funds are the same price but there is no “platform fee” on the UT) it is also simpler and quicker to get your money out of the unit trust than the ETF. To redeem a unit trust typically takes 48 hours from the time the forms are submitted to the time the funds are in your bank account (assuming all documentation is in order etc). However, with the ETF, they take 7 working days to pay out your money…this is far too long – where does the money sit in the interim and who is earning interest on the proceeds?
For my money – the Unit trust version is a better way to invest in SATRIX – every time!
I attended the launch presentation of ETFSA towards the end of November. Exchange traded funds are increasing in popularity both globally as well as locally so I thought I had better find out more. ETFSA is an investment platform which provides access to all the ETF’s in SA and also plans to make a an ETF retirement annuity an option.
While I can see the role that ETF’s can play in an investor’s portfolio there are a few misquoted stats and bits of information doing the rounds. Let’s look at a few of these…
1. According to Mike Brown and the slides he put up, “ETFs typically provide beta returns and low risk”. Oh no they don’t! I understand what he was trying to say but I am not sure that the bulk of the audience did. EFTs have a low tracking error and so there is a low risk of them not matching their benchmark, but they are not low risk investments. Just like unit trusts, and ETF is an investment vehicle, it depends how it is invested! An ETF that invests only in shares cannot be low risk – especially if we use volatility as the traditional measure of risk. So anyone wanting to buy into ETFs needs to understand the relevant benchmark that the fund tracks and the associated risks.
2. According to the presentation slides, ETFs are cheap and unit trusts (largely because of their performance fees) are expensive. Yes, some unit trusts are expensive because of the performance fees…but that is exactly the point – they have performed and therefore there is a performance fee! I agree, not all performance fees are equal and some of them are not calculated against appropriate benchmarks and worse still, some do not take into account the fact that new investors will never benefit from the past performance and so should not pay performance fees on past performance (but that is a topic for another post). But to put up a slide that shows that you could pay 11.5% per annum for a unit trust is, at best, misleading.
3. According to the slides, ETF’s outperform unit trusts. Let’s look at the Coronation Top 20 fund which “aims to outperform the FTSE/JSE Top 40 Index, is actively managed and typically holds no more than 20 large cap stocks at any point in time”. The fund has a performance fee on it and the TER (total expense ratio) is 3.28% pa, of which 2.13% pa is the performance fee. How has the fund performed? Since inception it has beaten the benchmark (effectively the SATRIX 40 Fund) by over 7% per annum. I will happily pay a performance fee for that thank you! It is true that there are a great many “average” fund managers out there and that many of them don’t beat the index. In SA, however, we have some very good managers who consistently and repeatedly beat the ALSI – partly because they are good at what they do and partly because the ALSI is so heavily skewed towards resource shares. So invest in an ETF by all means, but just because you do (and because it is cheaper) does not mean you will do better than if you had invested in a comparative unit trust fund.
4. Lastly, ETF’s definitely have a place in a portfolio but if I was going to invest into an ETF I think I would go direct and not via a platform – you are just adding another layer of fees (which was one of the criticisms about unit trusts). I think the only time I would probably use a platform is if I wanted to invest into an RA – now that might make sense.
Got an email from friend this week which went something like this…”Just got a mail from Nedbank to say I have 300 000 odd ‘Greenbacks’, their loyalty programme. I can exchange them for until trust investments. Wanted to know your opinion? I’ll have to put R5000 cash to open an account but can get around R11 000 or so more through the Greenbacks I got sitting in an account.”
What a great idea…I knew you could get shopping vouchers but had no idea you could get unit trusts as well, so I did a bit of research.
It turns out that through the “Greenbacks” scheme you can in fact exchange the rewards for unit trusts. The question is, would I rather have unit trusts or vouchers for Cavendish Square? And this is where Nedbank have been “clever”.
If you convert the Greenbacks to shopping vouchers you will get R100 for each 3500 Greenbacks – so for my friend, this would mean about R8500 worth of vouchers (a lot of retail therapy indeed). If, however, you invest in their unit trusts they will give you R100 for each 2800 Greenbacks – so he would get about R10700 which could be invested. He would be better off by R2200 by investing in the unit trusts – and it will be done at no initial fees – so it becomes very attractive indeed.
So would I do it? Absolutely! If I had Greenbacks “lying around” that I had accumulated through using my credit card with no “need” for vouchers then I think that this is a very attractive option indeed.
Taken from their website… Invest in unit trusts.
2 800 Greenbacks = R100 contribution
Invest in a Nedbank unit trust of your choice and pay 0% initial fee on your invested amount (save up to 5%)
- Minimum contribution of R5 000 to open a new unit trust account.
- Contribute in multiples of R100 (2 800 Greenbacks).
- A minimum of 140,000 Greenbacks points is required to invest in unit trusts.
And I guess if he really needed the cash, he could put the money into the Money market fund and redeem it shortly thereafter (but I am sure that is against the spirit of this and that there could well be some fine print somewhere to limit this).
I was recenlty approached by someone who was looking to save a bit of money for his newly born nephew…he wanted to put away R100 pm for the next 21 years or so. Not a problem I assured him – a unit trust is the way to go…
However, it appears that most unit trust companies are no longer interested in the smaller amounts and now insist on a minimum debit order of at least R500 per month. There are still 1 or 2 companies that will take R100 or even R50 per month but for the most part, they are not interested in less than R500pm.
Strangely though, you can invest in Satrix (or any other ETF) for R300 pm and this raises some very interesting questions. For example:
- Why have so many of the unit trust companies all decided that R500 is their minimum investment?
- What are investors with less than this supposed to do? (Please stay away from insurance products such as endowments.)
- Why dont mancos have 1 fund (e.g. a balanced fund) that will accept lower minimum investment amounts?
- ETFs such as SATRIX are a supposed “threat” to the unit trust industry, so why have the unit trust companies put their minimum investment higher than that of SATRIX?
For interest, the lowest debit order amount that any fund will accept is the Stanlib Equity fund at R50pm and the minimum debit order amounts for a few of the “prominent” companies are as follows:
- R1000 – Foord
- R500 – Allan Gray, Cadiz (most funds),Coronation, Investec, Nedgroup, Prudential, OM (most funds), Stanlib (most funds).
- R300 – SATRIX, DBX ETFs, RMB.
- R250 PSG Alphen, some OM funds and Cadiz (1 fund).
- R200 – ABSA, Sanlam (most funds)
- R150 – Metropolitan
- R100 – ABSA (3 funds)
- R50 – Stanlib Equity Fund
The latest developments in the Ovation Curatorship saga potentially have major ramifications for the entire unit trust and linked product industry and it is high time that the industry (ASISA and the FSB) woke up to that fact.
As I understand the development, the Fidentia Curators are wanting to block the application by the Ovation Curators to release investors funds from Ovation (90% at this stage with the balance to be released once the process is complete). The Fidentia Curators believe that Ovation owed Fidentia money. But Ovation has no money and so the Fidentia Curators want to claim the money from Ovation Investor’s unit trust funds. And here in is the issue.
Unit trusts have always been marketed on the grounds that investors own units in a trust fund. The money in the trust fund is just that; in a trust. It does not form part of the company’s assets. If the company goes down, the units in the trust are safe (this is a bit of an over simplification but serves the example).
Rightly so, the Ovation Curators don’t believe that the Fidentia Curators have a claim against investors’ funds – they are not and never were Ovation assets. Unfortunately for the industry, the regulators and industry bodies have been deathly silent on the whole issue – what they fail to grasp is that if the Fidentia Curators manage to convince the court that they can lay claim to investors funds (from their unit trusts) then the industry as we know (and love it) is forever changed. The whole attraction of unit trusts will be destroyed in one ruling.
It is high time that ASISA (which includes the old Association of Collective Investments as well as the Linked Investment Service Providers Association) wake up to this fact and do some public as well as behind the scenes lobbying – they can not afford not to. The future of the entire unit trust industry hangs in the balance.