The simple task of choosing a Unit Trust to invest in has long been exactly the opposite. Very complicated.
According to the latest Association for Savings and Investments South Africa (ASISA) stats for the period ending 31 March 2014, there are now a whopping 506 funds to choose from in the South African Multi Asset category.
The first question that pops into mind is:
“Out of 506 Funds to choose from, how do you choose a unit trust, or a portfolio of unit trusts which will help you get that cottage on the 3rd fairway in retirement?”
An often seen rule of thumb in the industry is to take a look at past performance, and make a call whether a fund cuts the mustard or not. Some go even further as to base their entire investment strategy on these past returns!
Say, for example you do your own bit of research on the past calendar year’s returns of all South African Multi-Asset Funds. You choose this category because you believe that the managers with this mandate can take advantage of shifts in relative value on offer (Think Equities vs. Bonds).
You then evenly spread your portfolio over the Top 5 performing funds for the next year. At the end of the year you once again pick the top 5 performing funds and rebalance your portfolio for the coming year.
As this graph below shows, beginning your analyses on 31 December 2003 and investing R100, you would’ve sat on R455.11 (Annualized return of 16.4%) at the end of 2013 had you decided on this “Top 5” strategy. Not shabby at all. But what this graph also shows you is how the JSE All-Share index fared compared to your master strategy. If you invested R 100 into the index you would’ve sat on R592.08 (Annualized return of 19.46%) at the end of December 2013, before fees.
“But hang on a minute. You are comparing Mutli-Asset Funds to the JSE All Share index. Surely this is not a fair comparison?”
“What if I told you that the top Mutli-Asset Fund in a given calendar year outperformed the JSE All-Share index by an average of 14% over the last 10 years, as shown in the table below?”
“Wow. That changes everything.”
The above shows us that Multi-Asset managers are capable of beating the JSE AllShare Index, it just does not happen to be the same set of fund managers year after year.
So the question remains, how does one choose a portfolio of unit trusts to secure you that cottage on the 3rd Fairway?
You place your trust in someone who makes it their job to ensure that investment research is not just a by-product of the financial planning process, but a major focus within their business. This is not an easy transfer of trust by any means, but leaving your retirement goals in the hands of someone you truly trust is the first step to that cottage on the 3rd fairway.
