Unit Trusts: Debunking the Myths & Determining the Best One for You
In a bid to provide clients with alternative investment solutions and respond to the changes in the regulatory environment, local financial institutions have introduced several collective investment schemes (also commonly called unit trusts and mutual funds) over the last financial year.
A unit trust is an independent trust structure that allows investors to invest pooled funds into a common range of assets. These investment structures are established under a trust deed, overseen by independent trustees and managed by a team of financial experts (called fund managers), according to the parameters outlined under the trust deed.
Investments are divided in units, upon initial purchase. Investors, therefore purchase units at a price determined by the value of assets held by the fund, prior to entry. Income/Gains are generally reinvested into the fund, resulting in appreciation in value of units held by investors (unit holders).
The Benefits of Investing in Unit Trusts
Investing in unit trusts provide an excellent opportunity to maximize returns including:
• the full upswing in asset prices (net of fees), these funds generally outperform, over the long-term, their respective benchmarks such as inflation, devaluation in the local currency, the stock exchange, etc.;
• management expertise is a key benefit of investing in unit trust products as the fund managers oversee the fund’s portfolios;
• diversification and the fund’s ability to participate in large and diverse investments issued on the market, that may otherwise be prohibitive for individuals to acquire, whether due to high minimum restrictions or to the complexity or exclusivity of issues.
• tax-free benefit, in the case of equity-based funds, this benefit is immediate, while fixed income funds will be tax-exempt if held for more than 5 years.
Although unit trusts and mutual funds are not new to the local financial sector, this investment option is seemingly less utilized by the average investor because of the perceived risk and complexities associated with it, is the sentiment expressed by Christopher Walker, CEO, JMMB Fund Managers (JMMBFM). He added several myths are associated with investing in unit trusts; it is therefore keen to ensure that investors have a solid understanding before investing.
Disspelling the Myths
All unit trusts are the same: This is a common misconception; in fact, there are several types of unit trusts, the most popular being: equity funds, money market funds, real estate funds, fixed income funds and balanced funds.
Money market funds are invested in largely short-term interest earning securities, such as, government certificates of deposits and treasury bills, one such example being the JMMB Giltedge Money Market Fund.
Equity funds are invested primarily in stocks and allow investors to own shares of a company with even a minimal purchase of units in the fund. JMMB Income and Growth is one such equity fund.
Investing in a well-managed real estate fund can bring balance, stability and superior returns to an investor’s portfolio, over the long-run. The JMMB Optimum Capital Real Estate fund participates in quality real estate ventures that delivers rental income and capital appreciation, which ultimately translates into increased value for unitholders.
A fixed income fund such as the JMMB Income Distribution, or its USD equivalent, JMMB USD Income Distribution or JMMB Bond Fund is a good option. Investors who are interested in investing in sovereign and corporate debt and other fixed income instruments, for the medium to long-term, would find these to be useful alternatives.
A balanced fund is another option for medium-term investors; it consists of both stocks and bonds and is often called a hybrid fund.
Only small investors should invest in unit trusts: Although, by purchasing units in a trust, small investors can benefit greatly by accessing assets that he/ she may not be able to afford as an individual (such as buying units in a fund that is largely invested in blue chip companies), this benefit is not limited to the small investor. Walker reiterates that “the returns and rewards that unit trusts offer are equally beneficial to larger investors and corporates seeking to diversify their assets”.
In addition, unit trusts offer the added liquidity that is usually favourable to institutional clients as units can be sold to access cash with sufficient notice. “However, encashment for the JMMB Bond Fund and JMMB Real Value Fund have a daily limit of J$5 million and J$3.5 million respectively to allow for prudent management and investment of the funds”, added Walker.
Determining the Right Unit Trust for You
The JMMBFM CEO notes, “Similar to any other type of investment, an investor has to consider several factors namely: ones risk profile, investment goal and the investment horizon/tenure, in order to determine the best unit trust(s) to include as part of his/her investment portfolio.”
Risk Profile: Whether an investor has a low, moderate, or high risk – appetite will determine the type of unit trust that is best suited for you. Walker explains that “for investors with a conservative risk profile who prefer low price volatility, unit trusts with assets largely backed by Government of Jamaica securities such as JMMB Giltedge Fund is an ideal investment option for this type of investor’s portfolio. While, unit trust portfolios that consists largely of equites may experience comparatively higher levels of volatility and historically have also offered higher returns. This is however best for investors with a moderate to moderately aggressive tolerance because of the potential fluctuation in the price of the unit.
Investment Goal: Equally important to an investor’s risk profile is his/her reason for investing. For investors who are motivated by higher returns, unit trusts with longer-tenures and capital appreciation over time, while providing protection from devaluation of the Jamaican dollar are ideal, advises Walker. While investors who prefer periodic cashflow and preservation of capital with the trade-off for correspondingly lower returns may prefer to invest in a fixed income fund. , A money market fund is best suited for this type of investor.
Investment Horizon/Tenure: Walker notes that unit trust purchases are not typically positioned as short- term investments; however investors with a short-term horizon of less than a year can also benefit from higher returns, when compared to a typical savings account, by investing in a unit trust that is backed by largely cash and cash equivalents, as they offer greater liquidity. A money market fund is ideal for a short-term tenure, the fund manager adds, “because an investor can easily sell his/her units to access cash.” Corporate investors can also take advantage of the prospect of earning higher returns on short-term cash placements and realize the value collective investment schemes (CIS) can add to the bottom line, Walker added.
Walker notes that while investors are mindful of price fluctuation over the short-term, greater focus should be paid to the long-term view and the prospect for the client portfolio meeting its ultimate objectives.
Of course, medium and long-term unit trust funds tend to offer higher rates of return because of the nature and type of securities that back these funds. While past performance of a fund offers no guarantee of future performance it is worthwhile to examine historical performance to establish relative comfort with level of volatility (unit price variability) of the fund(s) being considered.
A unit trust can act as a standalone investment as each is diversified across a range of assets. Notwithstanding, because funds vary in their tenure, risk and asset mix, they provide investors with the opportunity to further diversify their holdings and earn collectively higher returns, should funds be combined. Your investment adviser will be able to guide you through the exploratory process, assisting you in making the right choice, taking into account you risk appetite and investment horizon.