IN A NUTSHELL: As a regulated investment fund that offers cost-effective access to a diverse range of assets, a unit trust can be a valuable addition to a retirement fund portfolio.
Retirement funds face a daunting task: they must grow members’ savings enough to meet their retirement needs, while also protecting those savings from potential losses. The key to achieving this balance lies in building a well-diversified investment portfolio.
Let’s explain:
When you invest in a range of assets (known as diversification), you spread the risk of losing money.
For example:
- If you invest only in assets A and B and A delivers a poor return while B remains relatively stable, the value of your overall investment will go down.
- If you invest in assets A, B, C and D and A delivers a poor return, but C and D perform well, your overall investment could still grow, despite A’s weak performance.
Fortunately, the authorities have put regulation in place to help. Regulation 28, which forms part of the Pension Funds Act, limits how much retirement funds can invest in certain asset classes. This helps ensure that members’ savings are not exposed to excessive risk.
All retirement funds must comply with Regulation 28. Retirement funds can invest in, but not limited to:
- Up to 45% in offshore assets
- Up to 75% in equities (local and foreign)
No more than 25% in one company or entity
Unit trusts: A convenient option that complies with regulations
Many unit trusts are Regulation 28-compliant and approved accordingly. They must therefore follow the same investment limits as retirement funds and are well-diversified.
Including these funds in a retirement fund portfolio means you have peace of mind that the portfolio meets regulatory requirements. Unit trusts offer several other benefits.
Additional benefits of unit trusts
- Simplified access to more markets and assets: Unit trusts offer exposure to a range of markets and assets through a single investment.
- Cost-effective: The cost of investing in these assets via a unit trust is lower than when investing directly, like how buying groceries in bulk is cheaper. Retirement funds can also negotiate performance fees or flat fees to lower the overall investment cost.
- Professional investment management: Unit trusts are managed by investment experts who select and monitor the underlying investments on investors’ behalf. In other words, they do all the investment management, research and administration for the fund.
- Flexibility: It’s relatively easy to switch to a different unit trust or opt out of the fund.
- Easy access to the investment: Investors can withdraw money at any time at no cost.
- Well-regulated: Unit trusts are regulated by stringent laws, which means they are a safer option than unregulated investments.
Despite these benefits, there are also some downsides.
Drawbacks of unit trusts
- Fund choice: There are currently over 1 800 unit trusts available in South Africa, so knowing which fund to choose can be hard. An investment consultant can help trustees choose a unit trust or a combination of unit trusts that’s in line with the retirement fund’s investment strategy
- Not all funds perform equally well: Each unit trust would have its own performance and historical return
- Returns fluctuate with the market: The value of the investment will go up and down with the market and returns are not guaranteed. (Over the long term, though, the investment should grow.)
Further reading
Sources
FSCA: Collective Investment Schemes: The journey from saving to investing
M&G Investments: A guide to investing in unit trusts
Moneyweb: Regulation 28 of the Pension Funds Act: Your questions answered
Pensions World: Unlocking your retirement fund’s potential post Regulation 28
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