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Proof in the pudding for new breed of unit trust
Convenient and low-risk, but expensive, this new breed needs watching, writes LUCIENNE FILD
There are many investors who don't like to make choices, which is why a type of unit trust fund, known as a fund of funds, has taken off in the rest of the world - and will be offered to local investors from tomorrow. But this conservative option comes at a higher cost than other unit trusts, and some of its detractors point to possible underperformance. A fund of funds is a unit trust which invests in other unit trusts, instead of directly in shares.
A fund of funds must be invested in at least five other unit trust funds, or keep its assets in cash, says Rob Barrow, a deputy executive officer of the Financial Services Board. He adds a fund of funds must comply with the minimum liquidity requirement, at 5%, and is required to disclose the full costs to investors. The recent approval of the Unit Trust Control Amendment Act paved the way for the launch of this type of unit trust. Fedsure and Norwich are launching their funds of funds tomorrow. RMB is launching on June 30 and Absa, Sanlam and Standard Bank will follow on July 1, while Coronation will launch on August 1. Sanlam is launching two more on October 1.
If you invest in a fund of funds, the main advantage is that an expert fund manager selects a combination of unit trusts for you to lower the risk of the fund. Also it's convenient - you only have to choose one unit trust.
The main disadvantage is that they are generally more expensive than other equity unit trusts. In addition to their own charges, the fund passes on to the investor the expenses levied by the unit trusts it invests in. Your fee would typically consist of an initial charge and an annual service fee for the fund of funds. And the "hidden" cost is the upfront charge, annual service fee and compulsory fee of the underlying funds (incorporated in their daily unit prices).
Investors may also find the fee structure for the funds of funds differs to that charged by other unit trusts because the asset management companies are taking advantage of the recent deregulation of charges. You might find the initial charge is slightly lower, while the annual service fee is substantially higher to accommodate an annual trailer fee paid to financial brokers. Investors will come across two types of funds of funds - external and in-house. An in-house fund comprises a combination of unit trusts - all of which are managed by that asset management company. An in-house fund will usually be cheaper than an external fund of funds. Take for example the Fedsure Multi Fund of Funds (see the accompanying table), which is an in-house fund to be managed by m3 Multi Managers. In addition to the 5.19% initial charge and 0.40% annual service fee (both include VAT) levied on the Multi Fund, investors can expect to pay an initial fee of up to 0.27% on the underlying funds (normally 5.46%), an annual service fee of 0.85% (normally 1.14%) and a compulsory charge of 0.75% (if applicable). Anton Kok, chairman of the Association of Unit Trusts and managing director of Coronation Management Company, says a company can only offer an in-house fund of funds if it has at least five funds in its range (except if the fund manager is planning to hold a big portion of the assets in cash). A combination of only five funds can, however, result in an index-related fund, he warns.
An external fund of funds is a fund comprising a blend of unit trusts selected from various asset management companies. The main advantage of an external fund of funds is that risk is diversified across a number of fund managers, says Kok. But there's no way to avoid double charging with an external fund of funds, says Kok. Nick Steen, managing director of Old Mutual Asset Management, is not convinced that external funds of funds offer investors value for money. Needless to say, Old Mutual is not launching a fund of funds in the foreseeable future. Steen says for the price you pay to invest in a fund of funds you can just as well pay a financial adviser to select a couple of funds which match your profile. "The aim of funds of funds is to diversify between different management companies, but you can achieve this by investing through a linked-product company at similar costs. The difference is that you can switch funds when you want to - with a fund of funds you are in someone else's hands." Steen believes only an in-house global fund of funds (a local fund investing in international unit trusts) presents real value for an investor. Since the proof of the pudding is in the eating, watch the local unit trust performance table on how this new breed shapes up.
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