Page 136 - Profile's Unit Trusts & Collective Investments - March 2025

CHAPTER 7

and asset valuations educated guesses at best –
Arbitrage particularly in the case of collectibles, where prices
achieved at auction can fluctuate wildly. Even
Arbitrage is the activity of profiting
from differences in price when the exotics that are accessed via registered ETFs or
same security, currency, or mutual funds overseas are typically more volatile
commodity is traded on two or more markets. than traditional asset classes.
Where discrepancies between different markets
appear, the arbitrageur will step in to exploit the Balancing the Asset Mix
situation. The arbitrage dealer’s selling price is Increasingly, unit trusts are used not so much as
higher than the buying price. By taking advantage of discrete investment destinations but as the building
momentary disparities in prices between markets,
arbitrageurs perform the economic function of blocks of broader investment strategies. In the
making those markets trade more efficiently. current investment environment, relatively few
investors own a single unit trust – more typically, a
balanced portfolio is constructed using several unit
trusts that, together, match the investment profile and financial objectives of an investor.
In this environment it is not enough to know the different asset classes and their characteristics,
one must also understand how they work together. This is particularly relevant when it comes to
retirement funding products and annuities, where the regulatory framework and ethical
considerations both demand that investors receive appropriate advice and suitable products.
In short, an “either/or” view of asset classes is seldom applicable. While there are no doubt still
astute investors who shift investments between asset classes according to market conditions (eg,
retreat into cash when equity markets are volatile or declining), the majority rely on long-term
asset allocation for protection. In practice, only a small minority of investors actively switch
between asset classes in response to market cycles; most assume that the investment choices made
by fund managers and advisers will see them through.
This reality makes it imperative for financial advisers to grasp the complex relationships
between asset classes on the one hand, and the risk capacity, risk appetite and investment goals of
individual investors on the other. The solutions are seldom simple. Interest-bearing products
provide safety but typically do not produce enough growth in the long-term to adequately provide
for retirement needs.
Conversely, the volatility of equities means that too much exposure at the wrong time can
seriously erode retirement capital. To further complicate matters, costs and prudential regulations
must be taken into consideration, especially where retirement products are involved.

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