Shaun Krom from EasyAssetManagement takes us through the major trends and key factors reshaping the unit trust sector in 2024, including the rise of multi-asset funds, the impact of ESG considerations, and the influence of technological advancements on investment strategies.
What factors are driving the rise in AUM in unit trusts?
Unit trusts offer a convenient and accessible way for investors to participate in the financial markets. This ease-of-use stems from the expertise provided by a team of investment professionals. These professionals actively research and select a blend of securities, asset classes, and potentially even different investment manager strategies. This comprehensive approach allows unit trusts to deliver a well-diversified investment solution for investors.
The most popular unit trusts in terms of asset under management is the multi-asset high equity, or balanced, unit trust category. This is due to Reg 28 requirements requiring RA investors to invest in the multi-asset category. Since South Africa has a predominately young investor base and the fact that less than 6% of South Africans have enough money to retire, these investors select the highest risk/return category available to them. We have also seen that when the choice of allocation is not limited by retirement regulation, that investors allocate to global equities which has significantly outperformed the local market.
Easy Asset Management is proud to be one of the best performing unit trusts in the country year to date and over a five year period.
Going back to the question above, we see the high-equity and global equity categories as continuing to attract assets.
On the management side, there's still a strong emphasis on active management by skilled professionals, particularly in these multi-asset strategies. While advancements in technology are likely shaping the industry, the human element of security selection and asset allocation remains crucial. Data-driven decision making is also likely a key factor for successful investment management, though not explicitly mentioned. Unit trusts themselves continue to be an attractive option due to their affordability and ease of access compared to directly buying individual securities. Technological advancements may also be improving the accessibility and efficiency of unit trust platforms.
Multi-asset portfolios offer two key advantages to investors.
- Firstly, they provide access to a broader investable universe compared to traditional single-asset or even two-asset class portfolios. This wider diversification helps to mitigate risk and enhance overall portfolio returns.
- Secondly, multi-asset portfolios allow for dynamic risk management. By adjusting the allocation between growth assets (e.g., stocks) and income-generating assets (e.g., bonds) based on market conditions, the portfolio's risk exposure can be tailored to meet specific investment objectives.
Unit trusts offer a compelling combination of expert guidance, convenience, and growth potential. With professional managers actively researching and selecting investments for you, you can benefit from their market knowledge without the hassle of monitoring it yourself.
Plus, unit trusts provide access to a wider range of assets, including global markets, which can potentially deliver higher returns compared to traditional savings accounts. We see this extending to actively managed ETFs which have recently been launched on the JSE. Actively Managed ETFS are the fastest growing of the ETF universe in the US and is outpacing the growth of passively managed mutual funds in the US.
What role are online trading platforms playing in the continued growth in the unit trust sector?
The rise of online trading platforms is likely contributing to the continued growth of the unit trust sector. These platforms offer several advantages that can make unit trusts more appealing to a wider range of investors.
- Firstly, online platforms increase accessibility. User-friendly interfaces and educational resources can help demystify investing for newcomers who might have felt intimidated by traditional investment firms. Additionally, some platforms potentially offer lower minimum investment amounts, further reducing barriers to entry.
- Secondly, online platforms provide convenience and efficiency. They allow for easy buying, selling, and monitoring of unit trust holdings, streamlining the investment process. This convenience can not only make it easier for existing unit trust investors to manage their portfolios but may also encourage more frequent investing activity.
- Lastly, online platforms allow an investor to combine all their savings in one place from individual shares, to ETFS, unit trusts and even extending to life insurance. This allows for ease of management and accessibility.
South Africa has a young population that is comfortable with using apps to manage their lives.
An investor needs to first consider both their needs a risk tolerance. Different unit trusts have varying levels of risk, from conservative money market funds to high-risk equity funds. It’s essential to match the fund’s risk level with your personal risk tolerance and investment goals.
Then an investor should consider a fund managers expertise, investment style and background. Some managers may focus be deep value bottom-up investors while others may be more macro or thematic and this impacts the portfolio outcome. An investor can allocate to a range of portfolio styles to benefit from this diversity.
Although past returns should not be used to imply future returns, they are still a very useful metric to investigate. Looking at past returns can provide insight how a manager performs over various market conditions and can give an indication of a managers skill level.
Fees and expenses are crucial, and an investor should look at a fund managers TIC. High fees can erode returns, but remember an investor should always be focused on after fees returns so fees should be looked in conjunction with returns.
The rising tide of investor interest in ESG investing is expected to reshape the unit trust sector in two significant ways. Firstly, asset managers will likely launch a wider variety of ESG-focused unit trusts. This caters to a growing demographic who seek to align their investments with their values, while still aiming for positive financial returns.
Secondly, even traditionally labelled unit trusts might incorporate ESG factors into their selection process for underlying assets. This reflects a broader industry shift towards sustainability considerations. These ESG factors may be reported to investors, for example a manager might report the carbon footprint of their portfolio.
There may be new unit trust strategies focused on specific ESG themes, like clean energy or socially responsible companies. Overall, the increasing demand for ESG investments is paving the way for a more sustainable and responsible unit trust sector.
Concentration risk arises when an investment strategy relies too heavily on a single perspective. This risk can manifest at the security level (bottom-up) through overexposure to specific instruments or at the portfolio level (top-down) through excessive positioning for binary macroeconomic outcomes.
To mitigate this risk and achieve strong relative performance, one advocates for a blend of specialist managers with distinct, yet complementary, investment approaches. This diversification reduces undue risk.
One approach is direct offshore exposure through global investment portfolios. These can be broadly diversified across various asset classes (e.g., equities, bonds, real estate) or focus on a specific asset class. We are proud that our fund the Easy IP Global Equity Fund has been one of the top performing funds in the global equity category over five years.
This allows investors to get full offshore access, without using any of their personal offshore allowance, while still benefitting from the unit trust wrapper.
To learn more about unit trusts, you can check out EasyAcademy.
Gain key insights into unit trusts and learn what they are, how they work, their advantages, risks, and varieties. Get skilled in selecting, comparing, and trading unit trusts for savvy investing.
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Any opinions, news, research, reports, analyses, prices, or other information contained within this research is provided by an external contributor as general market commentary and does not constitute investment advice for the purposes of the Financial Advisory and Intermediary Services Act, 2002. First World Trader (Pty) Ltd t/a EasyEquities (“EasyEquities”) does not warrant the correctness, accuracy, timeliness, reliability or completeness of any information (i) contained within this research and (ii) received from third party data providers. You must rely solely upon your own judgment in all aspects of your investment and/or trading decisions and all investments and/or trades are made at your own risk. EasyEquities (including any of their employees) will not accept any liability for any direct or indirect loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from use of or reliance on the market commentary. The content contained within is subject to change at any time without notice.
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