Avoid past performance trapTHERE are two mistakes commonly made by investors in unit trusts.
The first is choosing a fund based purely on its past performance.
This is best illustrated by an example. If you had used this method of selecting general equity funds in December 1992, you would have chosen Syfrets Growth, Standard Bank Mutual or the Southern Equity fund.
Five years later your funds would be in the following positions in the general equity sector: Syfrets 13th, Standard Bank 16th and Southern 22nd. There are 22 funds in the sector.
Independent broker Derek Sumption, of Brantam Financial Services in Gauteng, says this example clearly demonstrates the foolishness of basing selection solely on a fund's past performance.
The other mistake often made by investors is to invest in four or five different funds - a great idea for diversification, but not if they all invest in the same type of shares.
In any market worldwide different types of shares perform best at different stages of the economic cycle.
In our own market, over the past two years we have seen strong growth coming from the small company-type shares, whereas the large blue chips have been rather subdued.
"It's important that in a long-term investment such as unit trusts you diversify into funds that invest in different types of shares," advises Sumption.
Sumption says two factors are critical to investors when choosing a unit trust fund.
1 The fund manager's style and philosophy.
You should have a basic understanding of the fund manager's investment style and philosophy. This includes aspects such as:
Once you have an idea of the fund manager's style, you can see if it fits your own risk profile.
2 The shares the fund invests in.
Determine the type of shares in which the fund is allowed to invest in terms of the fund mandate and its objective. Are they blue chip, middle company shares or small company shares? The sector in which the fund is categorised is not always an accurate indicator of the fund's assets.
Once you have determined all this, you can start creating your portfolio of funds. This is the relatively easy part, because you have done all the leg work already.
Sumption's advice is to choose two or three fund managers whose investment philosophy matches yours. Then select five or six funds from the different categories of funds.