On the 30th January 2018, fund managers Viceroy, who exposed accounting fraud in Steinhoff last year, published a report on Capitec, describing the company as a “loan shark with massively understated defaults – masquerading as a community finance provider”. The share price plunged to a low of R705.00 on the day, but closed at R915.92.

Graph: Capitec’s performance from 26th January to the morning of the 31st, showing the plunge following the release of the Viceroy report on the 30th. Note how the share price was already on the decline a few days before, suggesting some already knew about the pending report. (Graph source: Sharenet)

Institutional investors on their way to investing in Bitcoin

CME Group, the world’s leading derivatives marketplace, is planning to offer futures on Bitcoins by the end of 2017. The contracts will most likely be settled in cash, and will make use of a daily price from the CME CF Bitcoin reference rate.

Bitcoin futures would allow professional investors exposure to Bitcoin’s volatility, as well as the opportunity to trade the futures on regulated venues and use them as a hedging tool.

Q:

What is a unit trust fund and how does it work?

A:

Simply put, a unit trust fund is a way for you to invest your money.  You can invest in a unit trust fund through financial services providers such as a broker; an Investment Management Company or in some cases through your bank. A unit trust fund is a pooled resource, which means that it allows a group of investors to combine their cash and invest it.  Think of it like going in on a group gift. Taken altogether, those investments are called the fund’s assets.

So how does it work?

A unit trust fund is made up of equal shares which are called “units”; these “units” have a price called a Net Asset Value. While you as an individual invest in a unit trust fund, the fund itself is run by a fund manager, whose aim is to grow the overall value of unit trust fund.  The fund manager does this by investing the fund’s assets, usually by buying stocks, bonds, or a combination of these two securities which are listed on the Stock Exchange. These stocks or bonds are often referred to as a fund’s “holdings” and all of a fund’s holdings together are its “portfolio.”

A fund’s type depends on the kinds of securities it holds. For example, a small-company stock fund invests in the stocks of small companies. What you get as an investor or shareholder is a portion of that portfolio. Regardless of how much or how little you invest, your shares are the portfolio in miniature.

Source: Morningstar

It is never too early to start investing, but it is also never too late. At Sharenet, we offer a wide range of investing opportunities and will help you tailor your portfolio to your needs.

Visit www.sharenetinvestments.co.za for more information or contact our investment team on investments@sharenet.co.za.

Got an investing question? Ask our friendly Financial Services Advisor

Email: editor@sharenet.co.za

Sources of Income for Funds

Income funds focus more on providing investors with strong levels of income rather than capital growth. The main source of income for income funds are interest and dividends. Interest income is usually received in the form of coupon payments received from bonds, debentures, notes, preference shares and money market instruments in the fund. The fund reinvests this income and then periodically distributes it to investors on pre-determined distribution dates that could be monthly, quarterly or semi-annually. These dates are available on the fund fact sheet (minimum disclosure document).

Income funds can also invest in property. Individuals often buy property as a source of income. The property is bought and then put up for rent to receive the monthly rental income. Income funds are no different and invest in property companies listed on the Johannesburg Stock Exchange. These listed property companies receive rental income from their property portfolios and also make profits from selling property. This income and profits are then paid out as dividends. Another group of property companies known as Real Estate Investment Trusts (REITs) have to pay out at least 75% of its income to shareholders. It’s important to note that the payments from REITs are taxed as income while dividends from listed property- and equity companies are subject to dividend withholding tax. Unit trusts will indicate how the income is split between interest and dividends.

Why Yield is Important

The yield of an investment is the rate at which you earn income on your investment. If you invested R10 000 in a fund and over one year the fund pays out a total of R1 000, then the yield of the fund is 10% (1 000 ÷ 10 000). Now why is it so important to know what your yield is on an investment?

The main objective of investments is to create wealth or at least to preserve it. The value of R100 today is certainly worth more than the value of R100 you will receive five years from now. That’s because money loses value or purchasing power over time due to inflation. A smart investor knows that to create wealth, you first need to beat inflation. The return on income funds is predominantly measured by its yield and this usually is an indicator of the income you can expect to receive from the fund over the next year. The yield of your investment should therefore be higher than inflation and this difference is known as the real return (or spread above inflation).

Investor Profile

Income funds are mostly used as the low-risk portion of a portfolio aimed at generating cash flow for the investor. Someone looking to cover day to day expenses with their investment should consider an income fund, as these funds generally pay out income monthly or quarterly.

Income funds offer investors a return that beats inflation (currently about 5.5%) with little variability in the return. Your money is also readily accessible and funds can be withdrawn within a couple of days, giving the investor liquidity in case of an emergency. This makes income funds an attractive alternative to bank savings accounts that normally offers lower returns, and fixed deposits that lock you in for a set term and offers lower returns. The time horizon for income funds is generally short term (shorter than three years) and longer term investors should consider adding growth assets to their portfolio to maximise return. If you are looking to save for a down payment on a house or that overseas holiday you have been promising yourself, then an income fund is a great option to consider.

The Sharenet Income Plus Fund offers investors the opportunity to invest in an income fund that has returned more than 9.40% over the past year to supplement your income or to help to make your dreams come true.

Fund of funds (FoF) are unit trusts that invest in other unit trusts managed by different fund managers. Fund of funds are often referred to as multi-manager funds due to the fund’s exposure to multiple fund managers. The manager of the FoF selects the underlying funds and manages the asset allocation of the FoF. Investors are often sceptic about the value added by FoF managers that can justify the extra layer of management fees on top of the management fees from the underlying investments. The reality is that an excellent FoF manager can add value in many areas.

Asset Allocation

The FoF manager monitors the asset allocation of the fund daily to ensure the fund is well positioned for prevailing market conditions. The manager will for instance increase exposure to equity when expecting the asset class to outperform. Not all FoF managers actively manage the asset allocation, but those that do are usually experts in moving capital across asset classes. FoF managers can also select the best fund managers within each asset class. An asset management company that is excellent in managing equity funds, may not have the same level of expertise in managing fixed income funds. Combining funds this way may be out of reach for certain investors due to high minimum investment amounts. An investor can hence access the best of breed managers in each asset class by investing in a FoF.

Manager Selection

FoF managers have systems and processes in place to conduct a thorough due diligence on fund managers considered for inclusion into the FoF. Analysing fund managers generally consists of two steps. The first being a quantitative analysis of the fund manager’s performance and investment style to determine if the fund is a viable option for inclusion into the FoF. The next step is an intensive due diligence into the fund manager and the investment team. This often includes a visit to the offices of the fund manager and completing a questionnaire on the company’s investment process. This should help the FoF manager make the best choice when comparing and selecting funds to invest in.

Investment Style Diversification

Adding multiple fund managers into a single fund provides diversification across asset classes and investment styles. Fund managers have unique investment styles that follow a certain approach/strategy. Differing strategies will respond differently to certain market conditions. That means an investment strategy (like value investing) might do well in one year but could underperform in the next due to changing market conditions. This is where diversification comes into play. By combining investment strategies, you can offset the negative impact of a certain kind of strategy during the different market cycles and increase the stability of your return.

Lower Underlying Manager Fees

Fund of funds has scale and a lot more assets under management than a retail investor. This means they are in a strong position to negotiate management fees of the underlying funds they invest in. Sometimes the fund that is being considered for inclusion into the FoF will have an institutional fee class that charges a lower management fee than the retail fee class. These institutional fee classes have high minimum investment amounts that are out of reach for retail investors. By utilising institutional fee classes, a fund of funds can significantly lower its cost (measured by the Total Expense Ratio or TER).

No Capital Gains Tax When Switching

Fund of funds can switch capital from one fund to another without triggering Capital Gains Tax (CGT). Retail investors, on the other hand, will need to pay CGT if they switch from one fund to another and there was a profit on the fund being sold. If the investor decides to rather invest in a fund of fund, then the only time the investor could be liable to pay CGT is when selling units of the fund of fund. That means you don’t have to be concerned about being in the wrong fund because switches within the fund of funds trigger no CGT. View our tax in unit trusts article for more details on the tax treatment of unit trusts.

Conclusion

Fund of funds can certainly add value to investors with the most prominent trade-off being the fees that are usually higher versus the increased stability of portfolio return. The scale that fund of funds has could reduce overall fees, meaning a smaller cost for all the additional benefits. Some of the benefits include diversification, especially for investors with a low investment amount, and strong selection that should deliver superior performance. There is also no capital gains tax for a FoF when switching between funds.

Sharenet Investments manages three fund of funds that are registered South African unit trusts. The Sharenet BCI Conservative FoF has low levels of equity for the conservative investor. The Sharenet BCI Moderate FoF has more exposure to equity than the Conservative fund and is suitable for investors with a moderate risk profile. For the more aggressive wealth seekers, there is the Sharenet BCI Aggressive FoF that can invest up to 75% in equity and aims to grow wealth over the long term.