New year, new opportunity for better investment understanding

If one of your goals for 2023 is to grow your wealth, then it’s essential to make sure you have a sound understanding of investing. If you’re a relative beginner, a good place to start is with unit trusts, one of the most efficient building blocks of individual wealth that are easily accessible to the man in the street.

Let’s begin by defining unit trusts themselves. They’re one of the most popular forms of investments, but what are they, exactly? A unit trust fund (sometimes called simply a “fund”) is an investment vehicle that allows many different people to collectively pool their money, which is then invested into financial markets (such as the equity and bond markets) by a professional investment manager. This makes investing more affordable and flexible, while at the same time giving you access to highly trained investment professionals.

Unit trusts are divided into units of equal value. The number of units each investor receives is based on how much money they invest.

Different unit trusts invest in different markets.  An equity unit trust fund, for example, will invest in equity markets, a bond fund will invest in bond markets, and a multi-asset fund can invest across equities, bonds, cash and property.

Common terms

As we all know, every profession has its own terminology, or jargon, and investing is no different. Unfortunately, this unfamiliar language can be intimidating.  All you really want to do is make sound investment decisions, but you don’t understand the lingo. Below are some of the more common terms used by investors.  

Portfolio: A portfolio is simply a collection of either direct investments on a financial exchange, or different unit trust investments, owned by an individual or company.

Returns: Broadly speaking, the goal of every unit trust is to grow the value of your investment over time. It’s therefore no surprise that there are several terms that relate to this goal, starting with ‘return’ itself. Your return is the change in value of your unit trust investment over a certain period, such as over the past year. If your returns are positive, then your investment has appreciated – in other words, you’ve made money. Tip:  Check to see if your return is net of any fees (fees charged by the manager) have already been deducted – this is required in Class A (retail) unit trust reporting.

Index: When judging the performance of an investment, it makes sense to define what you’re measuring it against. If your unit trusts appreciated by 5% over the last year, how do you know if this is a good return? A common way to judge a return is to compare it to the return that the market achieved as a whole.

Say you invested in a unit trust that, in turn, invests in shares on the JSE, South Africa’s largest stock exchange. How did your fund fare in comparison to the JSE? To figure this out you would use a benchmark such as the JSE All Share Index. An index is simply a way of measuring something. If you had invested directly into the JSE, as opposed to through a unit trust, would you have done better, or worse than the JSE All Share Index?

Alpha: If your investment did better than the index, you might hear your investment manager use the term alpha. This is simply the amount of return that is over and above the return of the index. So, if the ALSI returned 2% over the last year, and your fund returned 5%, the alpha is 3%.

Volatility: Another important term that relates to returns is volatility. This refers to how much and how often the value of your investment fluctuates, driven by financial markets. Tip: Equity values move much more frequently, and in greater ranges, than bond values. This makes bonds a more conservative asset class than equities, and better for investors with short-term goals.

Assets: The investments that unit trusts invest in on your behalf are also called ‘assets.’ Assets are grouped into “asset classes”, a collective term that includes shares/equities, bonds, listed property and cash, as well as unlisted assets such as private equity. To learn more about the different assets, watch our video Understanding Asset Classes.

Diversification: Diversification is an investment principle that relates to the degree of differentiation of assets you hold in your portfolio. Does your portfolio have investments in shares, cash, property, and bonds? Does it hold assets in different geographies and different types of companies? If so, it’s a diversified portfolio. By holding a diverse range of assets, you can reduce the effects of volatility, since different investments perform well in different market conditions. The aim is to protect the downside of portfolio returns, while also boosting the potential for higher returns.

What can make investment terminology somewhat confusing is that some terms can be used in more than one way, and, in addition, there is sometimes more than one term for the same thing. Take “shares” for example. As the name implies, when you buy shares, you are buying units of ownership in a company. But shares are also called “stocks”, as well as “equities”. These terms are all interchangeable as they describe units of company ownership.

If you want to learn more about unit trusts, be sure to watch our “Guide to Investing” video series, starting with: Guide to Investing Part 1: An introduction to unit trusts.

For more information or if you have any questions, please contact your financial adviser, or feel free to get in touch with our Client Services Team on 0860 105 775 or info@mandg.co.za