Episode 002 - Window Shopping Unit Trusts

In our last talk, or should I say in your last read here – I mentioned a couple of things that made you aware of other investment possibilities, that are different from property buying. Again, I have nothing against property, I am just here to give you more knowledge of other investment vehicles which won’t need you to “book a viewing for 18h30pm”. So essentially we discussed WHY you should invest and now I think it would be good to see WHAT you can invest on. The HOW will come in later.

The aim for this blog entry is really about giving you more info on what is available out there. I want you to sound like you really know what you are talking about when you call these investment houses, and I am pretty certain that you won’t just “sound” like you know, you will know! You are about to walk into a grocery shop, and I need you to know what is on offer first and what it really means to you, before you can actually put in your basket and buy. Also, you will be able to choose which ones you can combine together to get what you desire.

WARNING: Everything will be explained in the simplest of languages – I am not here to scare you away and confuse you. If you are familiar (advanced level) with the terms you will be bored quick, so I am happy if you skip to more interesting parts.

Right! Let’s walk into the shop, aisle by aisle and get a sense of what is on offer. Remember what I meant by RISK from the last blog entry (if you don’t, please go check quick and come back). It’s very important that you do because each aisle has a certain level of risk in its investment aim. The products listed below are available as Unit Trusts.

Aisle No.1: Money Market Funds

Uhmm no, we’re not talking about the Money Market at Shoprite/Checkers (got you!), concentrate now. This is the most simplest of Unit Trusts and the one that has the lowest risk. It is quite similar to leaving a deposit at your bank, but the best part is that you get a much higher interest (fancy word for is yield). You essentially invest in debt instruments held by the fund, chosen by the fund manager, which attract a certain level of yield. If I had a bit of money to invest, but want to protect it while getting a better return than in the bank and planning to take it out in the next 6 to 12 months, I’d shop for these funds.

Aisle No. 2: Bond Funds

A 007 joke would fit in quite well, but I take you for a very serious human being, so I will let that one go. Anyway, this is next on the risk scale, and is for someone who wants to grow their investment but who is not really keen on huge returns, positive and negative (fancy word for this is volatility). Again you are buying into debt instruments, but on a larger scale. With your investment you could be holding bonds from the likes of Eskom, Government etc. This is for a short term of about 2 to 3 years of investing.

Aisle No. 3: Local Equity Funds

This is when you are now looking at long term; things are a bit interesting here. For the longest of time in my investment career, this has been my playground in terms of managing client’s portfolios. When you invest in these funds, you immediately gain exposure to shares listed in the JSE stock market. All of a sudden that “Time to take a look at what’s going on in the markets” slot on the 7pm news starts to look interesting. There is close to 400 shares listed in the JSE and each belongs to a certain category/sector of the market. Some are Mining stocks (Anglo American, Harmony, Goldfields), some are Property stocks (Growthpoint, Resilient, Fortress), and some are Banks (Standard Bank, Absa) etc, there’s quite a lot. So instead of you going through all 400, the fund managers have made it easy by combining different lists of shares that follow a certain sector/category. This we call an “index”. For example, there are unit trusts which track shares that have a high dividend forecast, stocks that are considered property, even the Top 40 biggest stocks in the JSE, or the Mining stocks I mentioned, etc. Since these are shares, you need to have some level of risk appetite and are willing to hold your investment for a longer period in order for you to realise any form of return, as there is a lot of volatility in this type of market. I will most probably right a separate blog on these, as there are many options out there, including building your very own portfolio of stocks that you choose and buy through a broker. Pretty exciting stuff!

Aisle No.4: Foreign Equity Funds

Once you step out of South Africa, you are now faced with a list that is quite huge, as there are stock markets in almost all the different countries (estimated at about 630 000 stocks). So again if you want to gain exposure into these different markets it is always better to buy into the different Unit Trusts / ETFs that track certain indices. Remember that since you are buying into foreign exposure, then you are now introducing currency risks into your portfolio. Your favourite part of the 7pm news will definitely be the R/$ exchange slot!

Aisle No. 5: Balanced Funds

This is the last aisle, and this is where you get a combination of what you have seen before in the other aisles. The fund manager mixes the different asset classes (the products found in the other aisles) and gives you a diversified fund which can protect you when one or two other asset classes are on the negative. Depending on how much risk you’re willing to take, you can choose a balanced fund that has more exposure to equities or ones that have more exposure in money market. Balanced funds can also add more assets to the mix by holding Gold for instance, or have an exposure to other commodities out there, so it really can be a 7-colour Christmas lunch depending on what you are looking for.

Hopefully that now gives you a very good insight of what is available at the shop and why you would want to buy it based on your level of risk. The logical next step would be for us to discuss HOW you can get your hands on these and how much they will cost you. So you better move around some stuff in your monthly budget, this is grocery shopping of the highest level! Try by all means to put at least R300 on the side, to prepare yourself. I promise you, you won't regret this!

Signing out