Billions flow into unit trust-linked products
A revolution is under way in the retirement and voluntary savings industries, and insurers are having to join in to defend their market share, writes CIARAN RYAN
Last year, of the R16,9-billion which flowed into the unit trust industry, over half is reckoned to have gone into these linked products - and the percentage is rising each year.
These products are revolutionising the voluntary and retirement savings market, and although life companies were initially slow to respond, many have now launched their own "linked" products to defend their share of the savings market.
Essentially, linked products allow a choice from a universe of 106 different unit trusts and to switch between these funds at a substantially lower cost than by investing directly.
The cost of switching within a unit trust-linked product is generally 0,25%, as against up to 6% when selling and repurchasing unit trusts in the conventional way.
Linked products are rapidly replacing the more traditional forms of saving, such as bank deposits, retirement annuities, endowments and even direct investments in unit trusts.
Unit trust-linked products were pioneered by UAL Merchant Bank in the early 90s. This was a radical departure from convention, where each fund manager marketed the company's proprietary unit trusts and not those of competitors. UAL turned this on its head, allowing investors to choose any unit trust, proprietary or otherwise.
Today, the linked market is dominated by Investec, TMA and UAL, followed by newer entrants Momentum Life, Commercial Union, Southern Life, Old Mutual and Liberty Life.
The traditional life company savings schemes, such as endowment policies, pension and retirement annuity funds, have several pitfalls, not least of which are the high sales and administration costs, and a lack of disclosure regarding actual returns.
"Although life companies publish annual rates of return on retirement annuities, the investor is never sure how much of his savings achieved this return, and will often find out only when the annuity matures," says Derek Sumption of Brantam Financial Services.
"It may take 30 years to find out, and by then it's too late. The linked product was developed to overcome many of these pitfalls. We far prefer these products for our clients than the conventional life products."
One of the major advantages of linked products to investors saving for their retirement is the ability to improve investment returns by opting for high growth unit trust funds, and so avoiding the low-yielding investments which typically depress pension fund returns.
"Unit trust-linked products give you all the benefits of unit trusts, but remove some of the shortcomings," says Llewellyn van Rensburg of Momentum Mangement Services.
"For example, if you want to save for retirement by directly investing in unit trusts, you cannot get the normal tax benefits. Investing through a unit trust-linked product, you can get those tax deductions. Also, should you be unhappy with your fund manager, or if you think another fund manager's unit trust would better suit your changing investment needs, you can switch at much lower cost. With linked products, there are no surrender penalties or nasty surprises as often happens with life products."
Reg Thomson of Investec's Investment Management Services says the advantages of linked products include transparent costs, low switching costs, the flexibility to investors of being able to tailor the investment to suit their risk profiles and changing market conditions as well as no cancellation penalties as in the case of life products.
Another benefit is the consolidation of the investor's unit trusts into a single statement, and the issue of consolidated annual tax statements.
So what are the negatives?
"Linked products are not for everyone," says Thompson. "For someone with very small retirement savings I would recommend a guaranteed portfolio immune to volatile market conditions.
"Furthermore, there are over a hundred unit trusts from which to choose, and that leaves a lot of room for error. One must be sure to get the best possible advice and be sure that the trusts selected meet your risk profile and investment needs."
An investor's needs change during the course of a lifetime. Van Rensburg says it may be more appropriate for a 35 year-old investor to select a high growth, high risk unit trust, but as retirement age approaches, a heavier weighting in guaranteed income funds is often recommended.
With linked products, investors anticipating a downturn in the stock market can switch into a guaranteed income or money market investment without incurring the 6% switching cost which applies when investing directly in unit trusts. Such high costs discourage switching, often leaving investors holding funds which have become inappropriate to the prevailing market conditions.