South African unit trust investment – does it make sense?

South African unit trust

South African unit trust investment – does it make sense?

Why a South African unit trust? The local stock market has performed poorly over the past few years. However, not all shares have yielded such performance, and not all investors have experienced poor returns. Why not? Diversification and offshore exposure.

Why invest in a South African unit trust?

The JSE alone has hundreds of listed stocks ranging from 1c to more than R1,000. When you compare South Africa to the rest of the world, South Africa makes up a small percentage of the global economy. Given the risks of a developing economy, it is prudent to have exposure to offshore assets.

A good portfolio needs to be diversified across a number of sectors, regions and asset classes. Creating such a portfolio can be incredibly expensive and difficult to implement. The research involved in managing such a portfolio takes significant skills and time.

Unit trust investing can give you the advantage of gaining access to a well-diversified portfolio. What’s more, you’ll gain access to expert analysis and ongoing research. South African unit trust managers pool the money of many investors. They can, depending on the fund’s mandate, invest in shares, cash, property and bonds, both locally and offshore.

How do unit trusts work?

Funds are pooled together with other investors. Then the entire investment portfolio is divided into units representing an interest in the overall portfolio. Unit trust funds are governed by the Collective Investment Schemes Control Act. All unit trusts are required to appoint an independent trustee, which ensures that the fund is run properly. The funds are held in trust, which means that they are safe, even if the investment manager is liquidated.

Interest and dividends earned on the underlying investments are generally reinvested and additional units are purchased for the investor. But this can depend on the fund and on the investor’s preferences.

Interest earned has to be declared in your annual tax return. Capital gains tax might also be payable should you withdraw from the unit trust having made a capital gain. The capital gain must also be included in your annual tax return.

How to select a South African unit trust

One problem investors may encounter is that there are even more South African unit trusts available than local shares. This makes selecting the right unit trust just as daunting a task as selecting the correct share.

In order to select the most appropriate South African unit trust for yourself, you need to understand your financial plan. You also need to understand the concepts of asset allocation, diversification and the risk-return relationship.

This is where it is helpful to have access to an investment adviser or financial planner. They can help you select the appropriate unit trust based on your financial plan.

The right South African unit trust will provide you with the appropriate overall asset allocation. This will ensure that you are exposed to the appropriate risk-return balance and are invested with reputable fund managers.

Due to the seemingly endless number of permutations involving the various asset classes, sectors, regions and company profiles, there are significant differences between the unit trusts available.

Fund fact sheets or Minimum Disclosure Documents are regularly published by fund managers. They are a great source of information, setting out mandate, objectives, track record and risk profile.

Some typical types of funds available are:

  • money market funds (investing in money market instruments issued by government, corporates and banks),
  • stable funds (having significant cash and bonds exposure and fairly low-equity exposure),
  • balanced funds (with a balance of equities, property, bonds and cash-type investments), and
  • equity funds (comprising mainly equity and limited or no cash investments).

What about offshore investing?

The local stock market has generally performed poorly over the past few years causing an increased interest in investing offshore. One way of investing offshore is to convert your rands into foreign currency and investing directly offshore. Direct offshore investments generally require larger initial lump sum investments and are typically not as flexible with regular monthly contributions.

It is also possible to invest offshore through a South African rand denominated offshore unit trust. This option is less administratively cumbersome and you invest your rands with a South African unit trust fund manager. The manager invests the funds offshore and the investment return is derived from the performance of the offshore assets and currency exchange rates. When you withdraw the funds, it will have to be redeemed into a South African bank account.

Unit trusts are a flexible, long-term investment

Unit trusts should be viewed as long-term investments. It’s generally not recommended that investors be invested in stable funds for less than three years, or balanced funds for less than five years. Equity funds should be considered even longer-term investments, with an investment period of at least 10 years.

South African unit trusts are highly flexible and can be bought as a lump sum or as a monthly accumulator.

A lump-sum investment in a unit trust may prove to be the most profitable over the medium to long term. But there are a number of benefits of accumulating unit trusts on a monthly basis.

For those of us who find saving difficult, a debit order can prove most useful. The monthly contribution is taken from your bank account before you have had a chance to spend your salary. Should you find yourself in a position that you need to skip a month’s investment due to an extraordinary expense, it is easy to stop the payment. You could then make up the payment over the next month or two, or alternatively skip the month’s contribution altogether.

Of course, investors can increase/decrease their monthly contributions (subject to some minimum monthly amounts) in line with disposable income.

Purchasing units over time

Another benefit of this type of monthly investment is rand cost average. When investing a lump sum, you purchase all your units at the ruling price when the investment is made.

This could mean making your entire investment at the time of a spike in the market. Buying units monthly allows investors to move into the market over time and reduces the effect of market volatility.

Adding to the flexibility of unit trusts is the ease with which they can be liquidated. The units can be sold at any time – reflecting in your bank account within 5 to 10 working days. But it should be remembered that unit trusts are generally intended to be long-term investments.


Jaco Hartman CFP® is a wealth manager at Netto Invest.

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