Nov 28

Unit Trusts or Share Portfolios – Which is Best For You?

Warwick Eastern Cape Regional Manager, Rudi Oosthuizen shares his insights regarding the merits and benefits of personal share portfolios and unit trusts.

“An investment in knowledge pays the best interest.” — Benjamin Franklin

As if choosing an appropriate investment strategy and correct asset allocation is not daunting enough, an investor needs to also select between having a Personal Share Portfolio (PSP) or a Unit Trust investment. Media campaigns have ensured that most current and prospective investors can name several asset managers, but very few can distinguish between a PSP and a Unit Trust investment.

Let’s have a closer look.

A Unit Trust investment is a fund that pools together several investors’ money. The investor does not directly buy a share trading on the stock market, but rather buys a unit of the pooled investment. The investment manager then uses the monies from the investors that bought units to buy shares on the stock market.

Each unit of the pooled investment has a price called a unit price expressed in Rand terms. By dividing the investment value by the unit price, each investor can calculate how many units he owns in the pooled investment. Unit prices are calculated on a daily or monthly basis and unit prices increase or decrease based on the growth or decline in the underlying assets (shares, bonds, cash, property). This determines the net asset value (NAV) of the day.

Today we have well over 1000 unit trust funds in South Africa. These funds are diversified across all the asset classes and risk profiles, both locally and internationally.

The main benefits of investing in a unit trust are:

  • Simple
  • High liquidity
  • Low initial investment amount
  • Professional fund management team
  • International and local asset class diversification within a single investment

When considering a PSP as an investment vehicle, the investor should bear the following in mind. A PSP involves a bespoke investment portfolio consisting of shares listed on the stock market, cash and perhaps unit trusts. A PSP is generally suitable for the discerning investor who would like an actively managed investment and, most importantly understands the risk associated with owning a share portfolio.

Having a PSP means that you own a stake in a listed company. This means that as company share prices rise and fall, so does your portfolio. While a bull run in the market can quickly create capital growth in your PSP, the converse is the equally true.  While a PSP still offers diversification, options are limited on the lower end of the risk matrix.

With a PSP investors experience that niche private wealth feeling. They also may have input on the shares included in the portfolio. These shares may include companies that have local and international exposure.

The main benefits of investing in a PSP are:

  • Bespoke share selection
  • Simplicity
  • High liquidity
  • A dedicated professional fund management team
  • International and local asset class diversification within a single investment

History tells us that shares have outperformed all other asset classes over time. If you understand volatility, CGT, economic cycles and would like a tailor-made investment product, a PSP is certainly something to consider. Should this not quite be your cup of tea and you prefer an easy entry to the investment world, a unit trust would meet your needs.

This is where your Warwick Wealth specialist becomes vitally important in providing you with highly-personalised financial planning, service and client care.