Investments Guide
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INVESTMENTS: GUIDES
- Introduction to Unit Trusts
- Who should invest in unit trusts?
- Can Equinox.co.za advise on suitable investments?
 
Equinox’s top tips
1. Take Responsibility
2. Understand How Much You Need To Save
3. Assess Your Assets and Liabilities
4. Settle Your Debt
5. Assess Your Pension Fund
6. Don't Be Sold!
7. Your Financial Advisor
8. Favour Growth Assets
9. Investment Decisions
10. Tax Planning
11. Don't Forget the Effects of Fees
 

Introduction to Unit Trusts

Unit Trusts offer you the ability to invest in a mix of the major asset classes - equities (shares), bonds and short-term money market instruments. When you invest in a unit trust you are effectively lumping in your money with other investors and paying a fund manager to invest it wisely according to a specific mandate.

Investors can invest much smaller sums of money in a unit trust and thus achieve a greater level of diversification than is usually practical when buying shares through a broker.

There is a broad choice of funds offering different combinations of capital growth and income across different market sectors. Some funds are now designed specifically to benefit from market timing and sector rotation.

Unit Trusts though, should generally be viewed as medium-to-long term investments, reducing your exposure to short-term volatility and risk and allowing you to take advantage of underlying trends in market sectors.

Many of the attractively named investment products offered in South Africa are based largely on a managed basket of unit trusts. In theory the extra layers of cost you incur are justified by increased returns at decreased risk. However, with your investment returns often measured in a few percentages above inflation, the effect of often insignificant looking percentage-based fees compounded over a few years can have a major impact on your wealth.

Large institutional investments from pension funds and packaged investment products have tended to dominate SA unit trusts, promoting a culture whereby it has often been difficult for the individual investor to access reliable information and transparent service. At Equinox.co.za we believe the times are changing - our up-to-date and comprehensive profiling of unit trusts and 24hr trading system allow the individual investor to successfully manage their own investments and enhance their returns directly through compounded cost savings.

The thirty unit trust Management Companies in South Africa offer over 400 different unit trusts. Each unit trust advertises a specific objective and investment guidelines within which the fund manager may use discretion. Often a market index (such as the JSE All-share Index) will be targeted, which the fund will attempt to track and outperform.

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Who should invest in unit trusts?

Anyone who has little or no debt, wants to accumulate wealth in the medium to long term and is prepared to accept a certain level of risk to achieve this.

With the advent of Equinox.co.za, unit trusts are a much more attractive investment than was the case previously. The high initial fees have deterred many investors, causing them to invest directly in shares or through using private portfolio managers (where the effective fees are actually very high). It is also the current practice (which could change) of the Receiver of Revenue to not tax unit trusts on their share trading profits nor to tax individual investors on the profits made from investing in unit trusts. On the other hand, the Receiver is getting increasingly aggressive on taxing individual investors’ share trading profits.

The combination of Equinox.co.za, the current tax advantages, and the inherent advantages of unit trusts may be the catalyst for the next growth phase in unit trusts.

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Can Equinox.co.za advise on suitable investments?

No. While the Equinox.co.za investment team has proven expertise in the construction and management of investments, we are not permitted to advise individual clients.

Many investors and their financial advisors base their decision on which unit trusts to purchase on their recent performance. Merely buying the top performing unit trust of the previous quarter has proven to be a poor investment over time. Equinox.co.za bases its investment recommendations on the expected future performance of the market as a whole and also which sectors we think will outperform.

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Equinox’s top tips

Successfully meeting your long-term investment goals should not be a matter of luck! A sensible and well-informed investment approach will always reap long-term rewards. Below are 11 sound pieces of advice that Equinox believes every personal investor should heed.

Take Responsibility for Your Own Wealth – Taking responsibility means that you need to know how much you should save/invest and being pro-active to ensure that your investment portfolio achieves adequate returns to meet your financial security and retirement needs. This does not mean that you need to be an expert on every aspect of planning and investing, although being better informed is likely to increase your sense of security. No one cares as much about your financial security as you do. Being responsible includes deciding on which asset classes you ought to invest in and ensuring that the people entrusted to look after those investments are performing (while not charging you excessive fees).

In order to take responsibility you need information (product information and the performance of your investments) and the means to carry out your investment decisions.

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Understand How Much You Need To Save – How much will you need at retirement to live comfortably? Bear in mind that "Save" includes additional amounts used to repay interest bearing debt. Check out the Retirement Calculator at Justmoney.co.za to help you assess this.

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Assess Your Assets and Liabilities – What kind of growth do you expect from your assets? Can you afford very appealing large investments, such as a holiday home, that may yield relatively low returns? And what about that dream car? The monthly repayments you make on an expensive car do not contribute in any way to your future wealth. Perhaps you should rather invest that money - and reward yourself after some years of good returns when you can actually afford the car?

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Pay Off Your Interest Bearing Debt First – If your bond rate is 10%, any investment has to go up at least 10% per annum after tax in order to justify not selling the asset to pay off the bond. It is generally not a good idea to have any money market deposits, shares or unit trusts until your interest bearing debt has been repaid. While shares and unit trusts can increase by more than 10% a year, this is not certain. You will be reducing your risk profile and increasing your long term returns (after adjusting for tax and risk) by paying off your debt. It is even more important that any credit card debt or overdraft is paid off owing to the higher rates of interest. As an interim step, consider combining them with your home loan, which carries a lower rate of interest.

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Assess Your Retirement Savings – Your pension fund often accounts for a major part of your planned retirement assets and income. Despite its importance, most people know very little about it (who the manager is, the performance of the fund, the fees charged, whether brokers were or are used and what their fees are). With the switch from defined benefit to defined contribution, you have both the right and the responsibility to have a say in the management of your pension assets.

Most people are shocked when they realise how poor their pension fund investment performance has been and how high the various fees are. If you are dissatisfied, investigate the alternatives to your current pension fund.

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Don't Be Sold! – "Investment products are sold, not purchased" is regarded as a truism in the investment and retirement industry. This means that brokers and financial advisors assume that you need to be persuaded to buy a product (on which they earn commission) rather than you deciding what you need and then finding the best provider for that product or service. Unfortunately, this often means that you buy a product that suits the broker, not you. As an example, if a broker sells you a 30 year life product, he receives up to 85% of your premiums in the first year. Should you need access to you money before 30 years, the surrender penalties are very high. Once you have established what you need to invest, that YOU decide what kind of investments suit you.

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Financial Advisors – It is often a good idea to use a financial advisor to personally assess your financial needs and guide you towards appropriate investments. However, use a reputable, appropriately qualified advisor that preferably charges by the hour. A financial advisor charging by the hour is far more likely to give you impartial advice that is in your best interests than a broker chasing commissions.

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Favour Growth Assets – Many financial journalists and financial advisors advocate that retirees (and those approaching retirement) should not take any financial risk, i.e. they should put all their money in the money market and not invest in shares. Given that an increasing number of retirees will live another 30 years, some believe that this advice is no longer appropriate. If you are then using all the interest to live off, this interest will steadily decline in what it can buy over time. It is essential that at least some of your assets grow in order to keep up with the effects of inflation.

Certainly equities have performed relatively poorly over periods of time. Equities are certainly higher risk and periods of under performance should be expected. However, over periods of five and ten years, equities have generally outperformed all other asset classes. This implies that under performance increases the chances that the market will do relatively well in the following periods.

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Investment Decisions - Many people would like to stay involved and informed but do not want to do the actual share picking. Unit trusts are the natural starting point for such people. They can then either make their own decision on which unit trusts to invest in or use a wrap fund (in which case the wrap fund manager will decide which unit trusts to invest in).

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Tax Planning - Tax can have a significant effect on investment returns over time. Interest is taxable as is trading in shares. In order to avoid paying tax on share profits requires holding the shares for long periods, typically five years or more. In these volatile times, five years can be a very long time in the life of a share. It is the current practice of the Receiver of Revenue to not tax the equity component of equity unit trusts. Until this changes (it may never change), unit trusts are a very tax effective investment mechanism.

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The Effects of Fees - Fees are usually charged both when you make an investment as well as an ongoing annual fee. These fees are often high and can have a very detrimental effect on investment returns. The fees can be particularly high in the case of some of the retirement and pension products (fees of up to 7% on an annual basis are not infrequent on small pension funds). Having one or more broker involved accounts for a large proportion of the fees charged. The retirement and insurance industry is under increasing pressure to disclose their fees.

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