Private Share Portfolios vs Unit Trusts.
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 focussed on giving investors a high income yield. A PSP can also exist within a wrapper such as a retirement annuity or preservation fund.
Below we highlight some of the differences between PSP’s and UT’s. 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 the global trend.
Portfolio can be tailored to individual’s unique needs and risk-return objectives.
Segregated, in client’s name
More meaningful exposure to less liquid smaller cap shares in a smaller segregated portfolio. Asset allocation shifts, which historically explain 80% of outperformance, require agility.
Funds are invested opportunistically over a period of time. If cash needs to be raised this can be done by selling the weakest holdings at the time which helps improve performance.
High level of engagement. Clients have direct access to the asset manager and client relationship managers. Clients can receive instant feedback.
Transparent and flexible fee structure
Incredibly transparent fees. Total fees should not exceed 1.5% per annum and are flexible for larger portfolios.
Capital Gains Tax (CGT) Planning
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 over time.
Each client receives the same UT. See-through analysis and effective diversification is difficult.
Agility is often lost to UT’s due to their larger size. UT’s can be cumbersome, the larger they become the worse they are likely to perform.
Funds are not invested with the individual client in mind. Funds are invested in a single day raising the risk of poor market timing. Cash is raised by selling units of the entire pooled portfolio rather than select shares.
All communication is via public media. There is no personal interaction with the asset manager.
Rigid and complicated fee structure
There are 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 costs associated with a UT are included in the Total Expense Ratio (TER).
No Capital Gains Tax Planning
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 far greater.
|Rank*||OAM Performance vs SA Unit Trust Group|
|1st out of 140||OAM Local Growth portfolio vs SA Multi Asset Class|
|1st out of 25||OAM Global Growth portfolio vs Global Multi Asset Class|
* Three years until July 2015
Investors can exit at any time. There are no exit penalties, but CGT must be paid. For PSP’s the R30,000 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 won’t be a single massive CGT shock when you exit a PSP.
UT’s 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 cheaper.