Page 55 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Basic Concepts

Competitive Cost Structures
Compared to most investment products, unit trusts and other collective investment schemes
have very competitive fee structures, and when it comes to cost rankings, unit trusts usually beat
all other products.
Having said this, when it comes to fees, deregulation has created a complex environment where
costs vary depending on the amount and the investment channel. Investors and advisors have to
pay attention to ensure they understand all the cost implications of different alternatives.
Fees are quoted under a variety of names, such as initial fees, annual management fees, and
advisor fees (commissions). There are explained more fully in Chapter 3. The ongoing fees of
collective investments (see EAC, Effective Annual Costs) are generally lower than those of
retirement products, insurance-linked investment policies and structured products. Transparency
and competition in the collective investments industry have had enormous benefits for investors.
The lowest cost funds in South Africa have total investment costs (ie, total charged to investors) of
under 0.1% per annum, a tenth of what they were two decades ago.
There are various ways of investing in collective investment schemes, each with different pros
and cons, each with different associated costs. Competition has steadily reduced costs for
investors. In recent years, for example, most management companies have reduced initial charges
to zero for direct investments (eg, via an online interface) while initial charges (commissions) still
apply if one uses a financial advisor. Others have eliminated initial charges and rely on the investor
and financial advisor to negotiate a commission rate. LISPs (investment platforms) represent an
alternative channel where investors can often elect whether to pay broker commission for advice as
an initial charge or a smaller ongoing trailer fee. (Note this would be in addition to the platform
administration fees and underlying fund fees.)
Very few funds still impose initial fees; where they do they range from 0.4% to 3.45% (on
specialist equity funds). Initial fees may be compulsory advice commissions. Even where these are
imposed, unit trusts compare favourably to other “institutionalised” saving options. Although
3.45% is up to three or four times the cost of buying shares through a stockbroker, it is less than
half the entry costs of products like endowment policies and life assurance, where total entry costs
are often as much as 7%.
Another advantage of unit trusts is that charges are fully disclosed. This level of transparency
has not existed historically in the life assurance industry, and it is common for a buyer of an
endowment policy not to know exactly how much of his cash is actually being invested, and how
much is going towards costs.

Convenience and Liquidity
Collective investments are easy to buy and easy to sell. Investors have the choice of buying unit
trusts on the internet, through a broker or agent, through a bank, or directly from the unit trust
management company. Debit orders can be cancelled, increased or decreased without penalty,
unlike traditional assurance products. It is easy for investors to change their asset allocation as
their personal circumstances change – they can switch from equity-based investments to
fixed-interest investments as required – and several services make it easy to manage a small
portfolio of unit trusts. Most importantly, managers or management companies are obliged to
repurchase participatory interests on demand, making collective investments highly liquid.
This flexibility and transactive ease has a dark side, however. It can lead to a lack of investment
discipline, and may allow investors to react emotionally to volatile market conditions: selling when
the market is falling, and buying when stocks are making new highs. Emotional reactions often
result in buying high, selling low – a sure way to lose money. This behaviour, in turn, can drive fund
managers into “forced trade” situations, where they have to buy into an expensive market because of
large inflows, only to sell into a weak market because of large outflows (ie, investors redeeming
units). So while convenience must be seen as an advantage of unit trusts, it does demand of investors
that they become more knowledgeable and disciplined in their investment approach.

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Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts