It is surely one of the most difficult choices to decide where to invest. The most important thing is to remember that you can invest in any product, whether a voluntary investment or one which resides under the Pension Funds Act, through Unit Trusts with the same legal benefits as you receive with traditional investments from Insurance Companies. Examples are a purely voluntary Unit Trust investment, a Unit Trust investment with the same rules as an endowment policy (without the penalties naturally), a retirement annuity, a preservation fund, a pension scheme, etc. The advantage is that the costs can be much lower and there are no penalties when the client takes an early retirement, or reduces or stops premium payments.
The question is, “Are Unit Trusts a safe investment?”.
Unit Trusts fall under the Law of Collective Investment Schemes and work as follows (I will try to explain this in as simple a manner as possible):
1. There are normally five parties (excluding the client) involved in any Unit Trust investment. These are the Custodian, the Trustees, the Asset Manager, the Administrator, and the Financial Planner.
2. In South Africa the Custodian and Trustee are mainly one of five A Plus graded Financial Institutions, namely ABSA, Standard Bank, First National Bank, Nedbank, and Computershare and these two parties are paid by the Asset Manager.
3. Every Unit Trust fund has a bank account which is held by the Custodian of that specific fund, and the Trustee’s duties are, inter alia, to calculate the return that is available on a daily basis in the media and also to ensure that the Asset Manager performs their duties in terms of the fund mandate. The Custodian and the Trustee may also not be the same financial institution.
4. The Asset Manager makes the daily investment decisions for the Unit Trust fund within the mandate that is registered with the Financial Services Board (FSB).
5. At present there are approximately 800 registered Unit Trust funda on the market. Instead of investing directly, the client can work through an Administrator and so invest in any or all of these funds. This is a cheaper option (initiation fees are not duplicated) to switch between funds when circumstances require this. Examples of these companies are Sanlam Personal Portfolios (Glazier), Fairbairn Capital (Galaxy), Momentum Wealth, Absa Investment Management Services, Stanlib, Investec, Allan Gray Investor Services, Equinox, etc.
This is a very broad explanation, with the objective of illustrating that your investment in a Unit Trust is one of the safest liquid investment options available today.
The only risk that you face with your investment is the mandate of your investment with the accompanying market movements from the lowest risk funds such as the money market through to the higher risk funds such as small market cap funds. It is here that risk profiles and investment agreements (mandates) play a cardinal role as your Financial Planner has the responsibility of placing your investment in the appropriate funds which match your investment goals.
An additional service offered by my company is maintaining a comprehensive investment report on each client and providing a quarterly report on investment returns.
In the next article I would like to expand on what a risk profile questionnaire and an investment mandate are, and how it is decided with the client which funds should be used for investment purposes.
Unit Trusts are not the be all and end all of investment options, and in time I will also report on other forms of investment.