3 points to help you navigate the unit trust clutter

With so many options to choose from, knowing which unit trust to invest in can be difficult. Fortunately, many of the regulatory bodies that help govern the investment industry have gone to great lengths to help make this process easier. One such organisation is the Association for Savings and Investment South Africa (ASISA). In addition to ASISA’s numerous investor education initiatives, it has also helped to standardise processes, reporting and terminology used throughout the industry.

Arguably one of the most important changes that ASISA implemented occurred in 2013 when it revised the standard used for the classification of unit trusts. Under the revised standard, unit trusts were reclassified in terms of:

• Where the fund invests;
• What it invests in; and
• How much it can invest in a particular asset class.

This means that investors can get meaningful information (albeit on a very high-level) about a unit trust just by referring to its ASISA category. But more importantly, it also allows investors to compare funds that are similar to each other. As shown in the table below, the classifications are divided into three broad tiers:

Given that there are over 1500 unit trusts to choose from, now may be a good time to revisit the classifications model to help you when making your fund selection. To demonstrate how it works, the below explanation looks at the ASISA classification of the Prudential Balanced Fund: South African (Tier 1) - Multi-Asset (Tier 2) - High Equity (Tier 3).

Tier 1: South African

The term South African refers to where the unit trust invests and how much it can invest in that region (i.e. its geographical exposure). As the Prudential Balanced Fund is classified as South African, the majority (no less than 70%) of its assets are required to be held locally. The classification does, however, also make allowance for the fund to hold offshore assets up to certain limits.

Tier 2: Multi-Asset

The second tier of the ASISA classification refers to the main asset class in which the unit trust invests. In this case, Multi-Asset means that the Prudential Balanced Fund is able to invest in a range of different asset classes.

Tier 3: High Equity

This tier relates to the main investment focus of the unit trust and is a subcategory of tier 2. High Equity refers to the maximum amount of equities that the Balanced Fund can hold. In this case, the classification allows the fund to hold a maximum of 75% in equities (local and/or offshore) with the remaining assets spread across different asset classes.

How it all comes together

Based on the above, we now have a good indication of:

• Where the Prudential Balanced Fund invests (mostly in South Africa, but it can invest offshore);
• What it invests in (a range of different asset classes); and
• How much it can invest (up to 75% in local and/or offshore equities; however, given that it is in the South African category, a minimum of 70% will be invested locally).

Familiarising yourself with the different ASISA classifications can help you tremendously when narrowing your search for a group of unit trusts that invest across similar assets.

How unit trusts within the same ASISA category can differ

Each unit trust’s ASISA classification provides a good indication of the fund’s expected outcome. The asset allocation is determined by the unit trust’s investment mandate and managed by the fund manager. Fund managers employ their own unique investment strategy when it comes to picking stocks and other asset classes. This is what differentiates one unit trust from another within the same ASISA category, and is also a major driver behind how the unit trust performs.

When comparing unit trusts within the same category there are a number of factors to consider. One of the items worth looking at is the unit trust’s history. While past performance is by no means an indication of future performance, it is an indication of the fund manager’s pedigree and how the unit trust has been managed previously. Consistent outperformance is usually an indication of a quality fund manager and therefore a quality unit trust. Looking at the Prudential Balanced Fund as an example, the fund has been ranked in the top quartile of top performers within its category for the past nine out of 10 years. Consistent performance like this that has helped Prudential win the Morningstar Fund Award for the Best Fund House Larger Fund Range for the past two years in a row.

There are many factors that should be taken into account when choosing a unit trust. Understanding the ASISA categories is merely a way to help narrow your search and to make comparisons more relevant. If you require assistance as to which option to choose, we suggest consulting a qualified independent financial adviser. Alternatively, for more information please feel free to contact our Client Services Team on 0860 105 775 or at query@prudential.co.za