Page 51 - Profile's Unit Trusts & Collective Investments - March 2025

Basic Concepts

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.
Pros and Cons of Collective Investment
Schemes
The relative advantages and disadvantages of collective investment schemes is best illustrated
by comparing CISs to other methods of investing in securities.
As described above, the main advantages of CISs include transparency, freely available price
and performance data, a high level of regulation, professional management, and guaranteed
buy-back of participatory interests.

Direct Investment
If you have enough capital, acquiring a share portfolio directly through a stockbroker is the
most obvious alternative to equity unit trusts. As a private investor, you need skill, time, and a cool
head to invest successfully in the stock market. Private investors have greater investment
flexibility and many may well outperform fund managers over time. Research suggests, however,
that the majority of retail investors with stockbroking accounts would be better off using unit
trusts or exchange traded funds (ETFs).
In 2013 two University of California finance professors published research showing how
individual investors earn poor returns from direct investments in the stock market (even before
costs). Their work has been confirmed in subsequent research that shows retail investors are poor
stock pickers who trade too often (driving up costs and impairing returns). The professors' 2013
study states that “many individual investors seem to have a desire to trade actively coupled with
perverse security selection ability”.
The advantages of direct investment include lower costs and more investment flexibility. The
main disadvantages are the high level of expertise required, the considerable amount of time
required to manage one’s own portfolio, and the relatively large amount of capital needed to
achieve adequate diversification. Obviously, direct investment is not ideal for regular monthly
contributions – another advantage of a collective investment scheme for a small investor.
Depending on the securities actually purchased, a direct portfolio may prove less liquid than a
collective investment – the CIS manager is obliged by law to redeem participatory interests
immediately, whereas securities are traded on a willing buyer willing seller basis. When shares are
not traded often, it may take a week or two to convert holdings into cash.
Like collective investment schemes, JSE broking firms are highly regulated, and investors
bear little risk of being victims of fraud if they deal with member firms.
Privately Managed Portfolios
A private equity portfolio of sufficient size can be entrusted to the care of a stockbroker or asset
manager. After investment objectives and a risk profile are established, shares are bought and sold
on the client’s behalf. Stockbrokers typically charge their clients an annual management fee of at
least1%ofthe valueofthe portfolio. Aprivately managed portfolio with a stockbroking firm may or
may not attract entry costs (usually no more than 1.5%); thesehavebecomehighlynegotiablegiven
that many unit trusts no longer charge initial fees. A major disadvantage is the large amount of
capital required (many large broking firms will not accept portfolios under R3m). Another is the lack
of third-party, published performance data for the portfolio management divisions of broking firms.
This can lead to a lack of competition, and a certain complacency when it comes to managing clients’
money. It also makes it difficult for investors to choose the right firm.
A number of asset management companies also offer privately managed portfolios. These
companies tend to be more expensive because they have to pay for the services of a stockbroker
to execute trades. Unlike broking firms, asset management companies tend to charge an

Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts 49