Universe expands but unit trusts are still the brightest star

By: Siobhan Cassidy, MoneyMarketing Contributor

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As much as exchange-traded funds (ETFs) have appeared to outshine unit trust funds in recent years, the old guard of the modern investment firmament look set to hold their place at the top table for investors and investment houses for the foreseeable future.

In fact, many unit trust managers have responded proactively to the challenge presented by the arrival of new products and platforms by adapting and improving their offering, a desirable outcome for all. ETFs are sometimes described as having democratised investing; it is worth remembering that unit trusts laid the ground for ETFs many decades ago.

The first unit trust was launched in the UK in 1931; they have been available in South Africa since the mid-1960s. They quickly gained popularity among investors because they made investing in complicated markets accessible and simple. Unit trusts have been so successful for so long because, by allowing exposure to a professionally managed, diversified portfolio for a relatively small investment, they offer a level of accessibility and convenience that appeals to investors of all levels of expertise. Or, as Fedgroup’s Chief Marketing Officer Tim Allemann describes it, “Unit trusts offer a simple way for investors to diversify their portfolios while letting the professionals do all the heavy lifting.”

According to a paper published in a Reserve Bank quarterly bulletin in 1967, titled ‘A review of the unit trust movement in South Africa’, the early success of unit trust funds, the first of which debuted in South Africa in May 1965, was “partly attributable to the fact that the country had just experienced a prolonged period of rapid economic expansion, which had produced inflationary tendencies in the economy… [and] … made potential investors more susceptible to the idea of hedging against inflation through equity investment.”

Since then, unit trusts have developed a significant track record of delivering good, reliable returns. Allowing investors with no knowledge or understanding of the market to gain exposure to inflation-beating returns, unit trusts have continued to grow and attract the lion’s share of assets invested in the South African collective investment space.

ETFs are much younger. The first prototype for the present-day ETF was listed in Canada in early 1990 and the first ETF to be listed on the JSE, the Satrix Top 40, made its appearance in November 2000. In recent years, the growth of ETFs has outstripped unit trusts as they have captured the imagination of fund managers and made investors out of many people who just weren’t interested before. Being listed makes them more transparent and adds a layer of regulation, and continuous trade on the exchange also means high liquidity.

Gontse Tsatsi, Head of Retail Client Management at Old Mutual Investment Group, says, “Despite the rise of new and alternative investment products internationally, in South Africa unit trusts continue to be favoured by many because they have a long track record of delivering investment returns and helping investors achieve their financial goals for emergency funding, financial freedom and building wealth.”

In addition to the track record, Tsatsi pointed out that most of what makes ETFs popular is “already offered and in the characteristics of unit trusts, which shows the vision in formulating unit trusts in the first place”.

Saying he thinks “unit trusts absolutely still have a role to play”, Michael Field, General Manager for Investments at FedGroup, says, “We have seen a lot of interest in things like ETFs, structured notes, model portfolios and the like; we need to consider what they do that the unit trust can’t,” adding that an ETF “is effectively just a unit trust sold via a stock exchange”.

Naledi Makiwane, Investment Specialist at Coronation Fund Managers, adds, “To date, unit trusts have dominated the South African CIS industry, with a market share of c.94% of the R3.3tn in industry assets. Hedge funds and ETFs share similar, low levels of market penetration, with around R150bn invested in each category.” She says unit trusts were a proven vehicle for meeting investors’ needs for several reasons, including their reliability, transparency, availability, cost-effectiveness and liquidity.

Kelin Pottier, Solutions Strategist at 10X Investments, explains that while ETFs were “useful building blocks in constructing a portfolio, they have historically fallen short of being complete solutions, and place the onus on the investor to determine how best to combine each asset class and navigate the market”. He adds, “Unit trusts, on the other hand, are dominated by actively managed single asset class strategies, which offer the prospect of market-beating returns as well as multi-asset solutions, which are professionally managed funds seeking to optimally combine different asset classes to achieve a return objective while managing/diversifying risk.”

Historically, the JSE allowed only those ETFs that tracked underlying indices or physical commodities to trade. Makiwane says this created a headwind to ETF penetration in the South African market, “which skews towards actively managed funds”. However, she adds, the change in regulation enacted in 2023 allowing actively managed ETFs (AMETFs) to trade on the JSE should lead to increased flows into ETFs.

The change in regulation allowing AMETFs to trade on the JSE means traditional unit trust investment strategies can now be offered in listed form but, says Pottier, it is still early days with not many more than a handful of AMETFs available on the JSE yet. Makiwane points to the US, where 74% of new fund launches in 2023 were AMETFs, “which could be a trend we observe in the SA market in future”.

Acknowledging that ETFs had addressed some of the shortfalls of traditional unit trusts, such as high minimum investments, lack of liquidity, limited transparency and high fees, Pottier says traditional unit trust managers had responded positively to the pressure, with some asset managers offering lower minimum investments and competitive fees on unit trusts. Old Mutual Investment Group’s Tsatsi agrees that the unit trust universe has not stood still but continued to evolve and grow.

“There are various types of funds within the unit trust range that are constantly evolving and growing. There are options such as Shar’iah-compliant funds, ESG-focussed funds, as well as more innovative indexation funds, ensuring options catered to every type of investor. New trends like cryptocurrencies and alternative investments are welcome as they encourage continuous innovation and improvement,” he says. Also, as the older guard, unit trusts have practical advantages. The wider investment industry has, over time, developed models, procedures and processes around these investment products, which trade in the primary market or over the counter; unlike ETFs, which are traded on an exchange.

Pottier says most industry players – including the large pension funds and the multi-managers, as well as financial advisors and LISPs – tend to prefer unlisted investment structures. “Very few LISP platforms and fund buyers have incorporated ETFs into their operational, investment processes and business models,” he says.

Anyway, as Fedgroup’s Field points out, “Just because it is new doesn’t mean it is better,” while emphasising that “the investment vehicle is less important than the substance”. “Investors should rather focus on what assets are going to deliver their return, understand exactly what fees they are going to be charged, understand who stands behind their investment (and add a healthy dose of scepticism),” says Field. His colleague Tim Allemann agrees, “The key is to understand what you are investing in and how much you are paying, and if you don’t, seek professional advice.”

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