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Sunday, February 1, 2009
Pooling resources

A common question posed by investors is, “Should I invest directly into equities, bonds, preference shares or property unit trusts etc, or should I use a pooled vehicle such as a unit trust?” There is a fairly common concern that investing on a pooled basis is not as efficient as investing on a segregated basis, i.e. having one’s own investment account, SAYS Ian de Lange OF See Investments.

At the end of September 2008, despite the decline in the prices of global and local equities, the value of all assets held by local unit trusts was at R647 billion. This was down slightly from the beginning of last year, despite net inflows, but still represents a large and growing component of the wealth and savings industry in South Africa.
The total number of local funds, including fund of funds and asset swap funds was 872 at the end of September 2008. Based on anecdotal evidence, the growth rate in new funds slowed down in the last quarter of 2008 and this is likely to be the case for some time, given the more recent proliferation of funds.
“Many clients baulk at investing into a pooled fund, such as a unit trust, preferring to maintain their own or managed segregated portfolios,” observes De Lange.
“Very often investors have an incorrect perception of pooled funds. Often this flawed perception, believes pooling to automatically produce lower returns, for no other reason that the investors segregated portfolio will be aggregated with other investors.”
Quite simply this is not the case. “Instead of merely outright dismissing the pooling option, investors need to take into account all the facts before making a decision. Perhaps that decision may be to use a pooled vehicle for a portion of one’s wealth.”
Not only has there been growth in the quantum of funds and investment capital, but also in the type of funds available. Many investors equate a unit trust with a portfolio of equity shares, but there are many forms of funds, including:
o Equity only funds;
o Specialist equity such as value funds;
o Sector specific funds such as gold funds or small cap funds;
o Various forms of fixed income funds;
o Prudential funds, which are balanced funds akin to pension funds;
o Flexible funds, which invest across various asset classes, while also varying their exposures.

Advantages of investing assets via a unit trust:
• Many fund managers spend more time on their more public unit trust funds as opposed to their segregated funds;
o A big consideration is that lack of tax on all trading within a pooled unit trust. This frees up the manager to act when necessary, without any hindrance of tax concerns. Tax considerations are a large hindrance for segregated portfolios, where each transaction triggers a possible capital gains tax event;
o The larger pooled funds are able to negotiate their fees down with stockbrokers. Where a private client may pay 0,5% brokerage, pooled funds pay 0,1% and lower;
o It’s far easier and quicker to liquidate a portfolio or a portion of a portfolio held via a fund than directly in the market;
o Investors can quickly achieve diversification benefits.

However, there are disadvantages of investing assets via a unit trust:
• Costs. Annual management fees and other costs need to be assessed relative to the value obtained;
• Dilution possibilities. In the event of a large cash inflow or outflow, all investors’ percentages of the underlying assets will change; and,
• Another possible hindrance to future performance is the size of a pooled fund. Larger funds have a smaller universe of available opportunities.

Pooled vehicles are not only for small investors. Many very wealthy investors have recognised the benefits of a tax efficient vehicle such as a unit trust, with excellent custodian benefits and have elected to use this instead of direct ownership of assets.
“We find that many investors are invested into various funds via different entry levels, such as retirement annuities,” notes De Lange, “but don’t aggregate exposures across asset classes on a regular basis. i.e. total up exactly how much of their funds is allocated to local equities, foreign equities, property bonds etc.”
Seed Investments produces a snapshot or total asset allocation for its clients on a monthly basis. “Please don’t hesitate to contact Vincent Heys at Seed Investments if you would like to get more insight into the service we provide high net worth clients.” Contact: Telephone: 021 9144 966; or email to: info@seedinvestments.co.za

Copyright © Insurance Times and Investments® Vol:22.2 1st February, 2009
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