Missed the MTBPS-breakdown webinar with Dr Adrian Saville, Dr Iraj Abedian, Sizakele Marutlulle, Dr Azar Jammine and Ryk van Niekerk? Watch it now.

Managing a unit trust portfolio in uncertain times

I recently inherited a large sum of money - have I invested it in the right unit trust?

Q: I read the advice provided in this article, and find myself in a similar position, but have already made an investment choice and would like to get an opinion on it.

As advised in the article, I was rather wary of the current political and economic dangers with the Brexit upheavals, the Trump administration and of course local uncertainty, particularly with regards the rand.

I recently inherited a large sum of money* and was worried about making sure it grows. 

Some background:

  • I am 36, a divorced father of two and an IT professional.
  • I am currently not earning a market-related salary, but intend to change that soon – applicable for the reason I chose the investment I did.
  • I have a very modest (read lower end) apartment on the East Rand, which I do not anticipate being much of an investment.
  • Other than the bond (below R5 000 a month), I only have some moderate credit card debt.
  • My car is paid off and I have no other accounts.

I have a small but ever growing investment portfolio which I manage myself (albeit rather badly since mid 2016, with what was a 32% profit now reduced to a meagre 2%), which consists of equities only. 

I have invested the amount I inherited in an Old Mutual Multi-Managers Enhanced Income Fund of Funds.

The thinking behind this was to preserve my capital, and obtain interest from it which I could use to pay off my credit card and shore myself up with some emergency funds while waiting for the markets to quieten down and I could get a better sense of direction.

This unit trust is mostly cash and bond based (unfortunately I misunderstood the effects of a weak rand on bonds, thinking initially that a weaker rand was a good thing).

I had initially wanted to put this amount in a Nedbank account which earns 8.5% interest (and I would not have been charged about R3 500 for fees).

My question is thus:

  • Is this a decent-enough unit trust or should I diversify a bit more, bearing in mind that I would prefer to receive interest for at least the coming year.
  • Would selling these unit trusts and moving the money to the Nedbank account be a better option?
  • After the credit card is paid off and I’ve shored myself up, should I keep the capital in such a unit trust and then use just the interest to invest in equities, unit trusts, property and so on – or would it make more sense to break this amount into R50 000 chunks and invest in different vehicles, such as “CoreShares PropTrax” or “Ashburton Mid Cap ETF”.

*Reader asked for sum not to be published.

 

Mags Heystek - Brenthurst Wealth

Every investor has different priorities when it comes to investing. Each will have a different risk profile as well as their own objectives (in terms of time frame, as an example). A comprehensive financial plan cannot be created without more information. Completing a financial needs analysis as well as a risk profiler will enable an advisor to get a better understanding of the client, which will put them in a better position to assist.

Current financial position

The reader has pointed out that his salary is below market value, with the hope of this changing in the future. Financial planning does take the future into account, but the salary issue is a large uncertainty at this point. The investor should rather work on his current salary in terms of savings. Drafting a budget is an effective way of managing cash flow, and will give the reader a better of idea of exactly how much money is leaving every month, and how much he can afford to save. 

Short term credit

Currently, the maximum rate of interest on credit cards is 21.48%. If this isn’t taken care of, the interest can pile up and interest will be paid on top of the credit card debt. It will be more advantageous to tackle the credit card debt first, using the money from the inheritance. Some might argue that the opportunity cost involved would outweigh settling the debt, but high interest bills can become very nasty. Also, an investment would have to provide a higher return as opposed to the interest rate on the credit card, and in the current environment, this is simply not feasible.

Tax viable options

Should the reader not be contributing to a pension fund with his current employer, it would be highly recommended that he invest in a retirement annuity (RA). The tax break is very attractive. The reader has the option to contribute up to 27.5% of his gross non-pensionable salary into an RA every year. Should he be in a position where he can contribute above that amount, the disallowed contributions can be carried forward to the next tax year, or he can invest the amount above the 27.5% into a tax-free savings account. Another option is to start saving for his two children in tax-free savings accounts as well, as children have much more time on their hands in terms of compounding interest.

Risk

The term risk and volatility can be used in parallel. Volatility refers to more ‘movements’ of the fund in the short term, and risk refers to the potential of gains vs loss. The higher the risk profile of the fund, the greater chance the fund will have more volatility. In the reader’s case, he has invested into an income fund. This fund has a lower risk profile, and certainly has less volatility due to the nature of the assets within the fund.

Old Mutual Multi-Managers Enhanced Income Fund of Funds

As the name suggests, this fund has ‘multi’ managers – Prudential and Coronation to be exact. Each management company directs funds with a roughly 50/50 split. The fund has no equity exposure, no offshore exposure, and no property exposure. It has a roughly 64.5% exposure to floating rate notes, which are tied to the interest rate. The interest generated by the floating rate notes will be directly affected by South African Reserve Bank mandated interest rates. But bear in mind that if interest rates go up, inflation will likely go up too, affecting the monthly amounts due in terms of any variable interest rate contracts (bond, credit card or car payments).

If we look at the fund’s three- and five-year performance indicators, they are 7.2% and 6.8% respectively (annualised).

It would be a better recommendation for this client to diversify his investments to include equity, property and offshore exposure. As I mentioned above, the time frame of the investment is important to know, but being 36, the reader has many more years of “investment time”, and can take on more risk. It comes down to the correct asset allocation, as well as management of the investment.

Questions answered

  • Is this a decent enough unit trust or should I diversify a bit more, bearing in mind that I would prefer to receive interest for at least the coming year.

In my opinion, if the reader is looking at a short term (one-year) investment, it would be more beneficial to park the capital in the Nedbank account. He will receive a higher interest rate, and (I am assuming) pay a lower fee. The Old Mutual fund currently charges 1.27% per annum.

  • Would selling these unit trusts and moving the money to the Nedbank account be a better option?

For the short term, yes, and in the long run, yes (into a more diversified portfolio)

  • After the credit card is paid off and I’ve shored myself up, should I keep the capital in such a unit trust and use just the interest to invest in equities, unit trusts, property and so on – or would it make more sense to break this amount into R50 000 chunks and invest in different vehicles, such as “CoreShares PropTrax” or “Ashburton Mid Cap Mid Cap ETF”?

No, the recommendation would be for the client to diversify from a fund level (by investing into more than one fund), and there is no real need to break it up into chunks; it is diversified within the funds, as well as into different funds. The index funds provided are viable options, but it would also be more beneficial to compare apples with apples. Index funds are typically at the mercy of the market, but unit trusts have the ability to change their mandate and asset allocation (unit trust dependent).

Do you have any questions you would like answered by registered financial planners?

SUBMIT YOUR QUESTION SIGN UP AS AN ADVISOR
Moneyweb Insider INSIDERGOLD

Subscribe for full access to all our share and unit trust data tools, our award-winning articles, and support quality journalism in the process.

ONLY R63pm

Choose an option:

R63 per month
R630 per year SAVE R126

You will be redirected to a checkout page.
To view all features and options, click here.

A monthly subscription is charged pro rata, based on the day of purchase. This is non-refundable and includes a R5 once-off sign-up fee.
A yearly subscription is refundable within 14 days of purchase and includes a 365-day membership.

Click here for more information.

COMMENTS   0

You must be signed in to comment.

SIGN IN SIGN UP

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

Podcasts

NEWSLETTERS WEB APP SHOP PORTFOLIO TOOL TRENDING CPD HUB

Follow us:

Search Articles:Advanced Search
Click a Company: