Shares vs. Unit trusts

Connie Bruwer from PC Bruwer and Partners advises about this important topic.

Question:  A customer wrote: “I can spend a small amount per month on shares. All the financial advisers who I contact is very reluctant to say which agency I should use. Everyone suggested that I put money in a unit trust instead. However, I want to take more risk and currently have money for it. “Connie, what advice do you have for him?

Connie:  I can tell you about a direct equity portfolio, but the “small amount” to which you refer, bothers me. It is doubtful whether a stock broker will be interested in investing small amounts. Usually, shares are bought and sold in bundles of 100. This is an expensive way for a small investor to invest in shares.

If you have enough confidence in your knowledge of the stock market or want to speculate for fun with small amounts, you can invest through one of several internet merchants.

If you have friends who want to enter the stock market with you, you can even consider starting a club. Sanlam’s iClub is an example, and can even provide a bit of fun to your finances. I can understand that brokers would prefer you to rather take a unit trust investment. Few of them can provide you with a unit trust investment and therefore they will not make money from you. It’s a little cynical, but it’s true.

Question:  What other points would you like to touch on?

Connie:  The other point I want to make is on the issue of “little more aggressive” investing. I find that many readers do not look at unit trusts when they seek “really” good growth. Nothing is further from the truth. Unit trusts, or collective investment schemes as it’s called, offers precise investment choices and you can choose between unit trusts funds ranging from very conservative to moderate to highly aggressive.

Question:  What’s the difference?

Connie:  The big difference, and this can be important, is that with a unit trust fund you cannot put all your eggs in one basket. Diversification is one of the major requirements for a meaningful and responsible investment. To ensure significant risk distribution in a direct equity portfolio, you must invest in a bunch of different shares, even in foreign companies. In terms of the sometimes high price of a single share, the number you need to buy, and the range to get diversification, will mean that we’ll be talking big money.

Question:  What do you get with a unit trust fund?

Connie:  With a unit trust fund you get exactly that at a lower price because you do not buy the full share, but a lower proportion of a number of shares – so a few shares. You share in the market action of each of the shares, but it is limited to your piece. If we take the Allan Gray Balanced Fund as an example, we see he holds about 57% of South African shares, with well-known and sought-after shares like SABMiller, Remgro, Richemont and MTN that are strongly represented.

Question:  Does this fund also have foreign shares?

Connie:  This fund also has foreign shares and part is cash assets that make the risk spreading even better. Other asset managers have similar funds. You have to look around and decide which one you like.

If you really feel very aggressive, there are unit trusts that simply invest in shares, but then you do not have the risk-reducing effect of the more moderate asset classes. You still have the distribution of your investment in more shares. You also have the advantage of expert asset managers to choose it for you.