There are significant differences between pooled investments such as unit trusts (UT’s) and private share portfolios (PSP’s). PSP investing involves a bespoke investment portfolio in which shares and other securities are held in the client’s name, and are bought and sold on behalf of the individual client by the asset manager. The asset manager will invest directly in the market and will avoid investing through middlemen, like unit trusts.
Asset allocation and share selection within the portfolio can be customised to suit the client’s precise risk-return objectives. This may range from equity-only portfolios through to more conservative portfolios focused on giving investors a high-income yield. A PSP can also exist within a wrapper such as a retirement annuity or preservation fund.
Global trends show that as investors and advisers demand greater transparency, there is growing appetite for PSP’s as part of an overall investment solution. Given the wider choice, flexibility on fees, enhanced agility, and greater transparency, South African investors are increasingly following this global trend.
Below we highlight some of the key differences between Private Share portfolios and Unit Trusts:
Portfolio can be tailored to individual’s unique needs and risk-return objectives.
Each client receives the same UT. See-through analysis and effective diversification remains difficult.
More meaningful exposure to less liquid smaller cap shares in a smaller segregated portfolio. Asset allocation shifts, which historically explain 80% of outperformance, require a high level of agility.
UT’s can be cumbersome – the larger they become the worse they are likely to perform.
If cash needs to be raised this can be done by selling the weakest holdings at the time, which also helps improve performance.
Cash is raised by selling units of the entire pooled portfolio rather than select shares.
High level of engagement. Clients have direct access to the asset manager and client relationship managers.
Clients can receive instant feedback.
All communication is via public media. There is no personal interaction with the asset manager.
Incredibly transparent fees. Total fees should not exceed 1.5% per annum and are flexible for larger portfolios.
Too many middlemen all charging fees including custodial fees, audit fees, legal fees, trustee fees, distribution and marketing fees, platform fees, and performance fees. Not all associated costs are included in the Total Expense Ratio.
CGT is levied every time a share is sold. Clients will pay CGT every year, making full use of their CGT annual exclusion, and locking in relatively low CGT rates. South Africa’s CGT rate is low by international standards and will inevitably increase.
CGT is only levied when investors sell the UT which means CGT may not be paid for a number of years. While beneficial over the short-term the CGT rate is likely to rise over time making the eventual total CGT liability is far greater.
Investors can exit a PSP at any time. There are no exit penalties, but CGT must be paid. For PSP’s the R40,000 CGT annual exclusion is used every year. The annual exclusion cannot be rolled over to the next year – it is a “use it or lose it” benefit. Unlike a UT, there will not be a single massive CGT shock when you exit a PSP.
Unit trusts are typically big mass-market retail products. They tend to be cumbersome and expensive. In contrast, PSP’s are smaller boutique-style wholesale products. They are agile, user-friendly and more affordable.
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