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Helpful criteria when choosing a unit trust investment fund

July 17, 2023
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Finsesh
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Finsesh

Helpful criteria when choosing a unit trust investment fund

Dont know which funds to choose when investing? Dont stress, you will gain practical information in this blog that you can apply to help you invest for better outcomes.

There are more than 1000 unit-trusts in South Africa, making the task of picking funds just as difficult as picking a stock to outperform the benchmark or finding a needle in a haystack. We will be looking at the most important factors when deciding on a fund via its minimum disclosure document (MDD) or fund fact sheet. We will study the important parts of an MDD then take three funds from three different ASISA categories and study their MDD to do some practical examples. An MDD provides a story about each fund, but first we need to know how to read the storyLets begin.

ASISA Fund classification  

ASISA fund classification applies to all collective investment schemes (CIS) in South Africa. Unit trust form part of CIS and hence the classification applies. The aim of the classification is to establish a standard for every fund and categorise them per their main asset class of investment. The naming convention works as follows. The first part is Where, this indicates the geographic exposure of the fund. The second part is followed by what, that indicates the main asset class the fund will be invested in. Knowing the classification of your fund tells the first part of the fund's story.

Track record: Track record creates a feeling of trust in the fund knowing that its been around for an amount of time to prove its worth. Fund managers can have short term outperformance of their benchmarks but doing this over longer periods becomes more difficult. We recommend that the fund you are researching be at least 5 years old. This can be found either by looking at the inception date of the fund or if they show a performance number for the fund longer than 5 years.

Fund objective: Fund Objective will give you guidance as to what the fund is trying to achieve and if the desired outcome is what you are needing from the investment. There is no specific naming convention for this on the MDD, so look for anything relating to fund-, investment-, or return objective.

Term and risk profile: Due to no standardisation of MDDs, these two factors must be studied together to give you an idea of the risk level of the fund and how long the investment manager recommends being invested in their fund. Look for an indication of the minimum investment term suggested and if a risk indicator is provided suggesting the risk level.

Performance vs Benchmark: As the saying goes the proof is in the pudding. Its all good and well to say that you want to achieve a target, but if you are not doing it, then there must be a better manager out there in this category. Your fund should be outperforming its benchmark at least for the period it suggests that you need to be invested for and hopefully longer. If your fund is underperforming the benchmark over the recommended investment period, try either to invest in its benchmark or do more research on its competitors' funds that you can find here.

Fund one: Old mutual Global equity feeder fund

ASISA Fund category: This fund falls in the Global-Equity-General section. Using our fund classification rules we know where the fund invests is globally and in general equities is the what the fund invests in.

CriteriaFund specificAchieved?
Track record30 April 2000 launchedYes
Fund objectiveThe fund aims to offer superior returns over the medium to longer term by investing in shares from developed countries around the world.The fund invests in shares in developed countries. This sounds like global equity exposure. Is this what you are looking for?
Term and risk profileModerate to high risk (they dont take currency fluctuations into account) and a minimum investment term of 5 yearsSounds like a risky investment over a minimum of 5 years, so long term investment. Is this what you are looking for?
Performance vs benchmarkThe fund suggested a minimum 5 years and underperforms the benchmark over 5 and 7 years.No, the benchmark has not been beaten over the recommended investment term.

 

Fund two: Allan Gray Balanced fund

ASISA Fund category: This fund falls in the South African-Multi Asset-High Equity section. Using our fund classification rules we know where the fund invests is South Africa and in multi asset high equity is the what the fund invests in mainly.

CriteriaFund specificAchieved?
Track record1 October 1999 launchedYes
Fund objectiveThe Fund aims to create long-term wealth for investors within the constraints governing retirement funds. It aims to outperform the average return of similar funds without assuming any more riskLong term wealth sounds good but is restrained by reg 28(governs retirement funds) meaning that there will be asset class limitation that could limit your growth. This is great for a pension fund choice. Is this what you are looking for?
Term and risk profileAre comfortable with taking on some risk of market fluctuation and potential capital loss, but typically less than that of an equity fund with a minimum investment horizon of 3 years.Less risky than an equity fund, and a minimum period of 3 years also tells me it's less risky than an equity fund.
Performance vs benchmarkThe fund suggested a minimum 3 years and outperforms the benchmark over 3, 5 and 10 years.Yes, the benchmark is beaten over the recommended investment term.

 

Fund three: Prescient Income Provider Fund

ASISA Fund category: This fund falls in the South African-Multi Asset-Income section. Using our fund classification rules we know where the fund invests is South Africa and in Multi Asset where Income generating investments is the what the fund invests in mainly.

CriteriaFund specificAchieved?
Track record31 December 2005 launchedYes
Fund objectiveThe Fund aims to return CPI + 3% per annum through a full interest rate cycle while providing stability by aiming never to lose capital over any rolling 3-month period.Never losing capital over 3-month periods sounds very conservative. Is this what you are looking for?
Term and risk profileThese portfolios typically have no or low equity exposure, resulting in higher interest yields and stable capital values with the probability of capital losses over the shorter term (3 months) highly unlikely.If capital losses are highly unlikely over a 3-month rolling period, it seems that this fund can be used for short term investment needs.
Performance vs benchmarkThe fund suggested a short-term investment period and outperformed the benchmark over 1,3, 5 and 10 years.Yes, the benchmark is beaten over the recommended investment term.

 

There are other factors that will have to be considered too, such as cost and minimum investment amounts, but the criteria we discussed will sort funds according to your investment needs and provide you with some surety that the fund is not a fly by night and has proved itself over a long period. Using the suggestions provided should help you invest better.

* This is not financial advice, please do your own research on funds. 

* Historical returns are not a guarantee for future performance

 Onward to Financial Independence 

If you found this blog post helpful please follow us on Facebook and Twitter @finsesh for more tips on Financial independence. 


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