WEALTH OF INSIGHTOLD MUTUAL WEALTH INTELLIGENCE

Old Mutual Wealth is brought to you through several authorised Financial Services Providers in the Old Mutual Group who make up the elite service offering.

There has been no real change in flows into equity unit trusts. One of

the main reasons for the move from money market funds into multi-asset

funds is that investors need to preserve their wealth and earn a return in

excess of inflation in order for that to happen. Having equity exposure

in their portfolio is critical to achieve this and because equity is a riskier

investment, balanced funds are seen as a safer, more diversified option.

LISA AIREY, INVESTMENT ANALYST, WEALTH INTELLIGENCE

INVESTING IN

UNIT TRUSTS

When investing your client’s money into unit trusts over the long term,

it is important to take a step back to understand what is happening

in the industry and what the current trends and risks and returns are.

THE WELL-DESERVED POPULARITY OF BALANCED FUNDSThe Association for Savings and Investment South Africa’s (ASISA’s) June

2014 statistics revealed that most South African unit trust flows went into

multi-asset categories over the last twelve months, with the SA Multi-Asset

High Equity category being the most popular. This category houses funds

like Old Mutual Balanced Fund, Old Mutual SYm|mETRY Balanced Fund

of Funds, Allan Gray Balanced Fund, Coronation Balanced Plus Fund,

Investec Opportunity Fund and Foord Balance Fund.

Looking back at the past five years, we have seen industry assets

shifting away from money market unit trusts into the multi-asset

class categories, making this the biggest category in the unit trust

industry with 43.4% of assets. Money market dropped from 30.5%

to 16.5% over the period as depicted in the graph on the next page.

Source: ASISA

WEALTH OF INSIGHTOLD MUTUAL WEALTH INTELLIGENCE

Old Mutual Wealth is brought to you through several authorised Financial Services Providers in the Old Mutual Group who make up the elite service offering.

UNDERSTANDING HOW YOUR FUND IS LIKELY TO BEHAVEThe scatter plot below illustrates the volatility and returns of all the

unit trust categories by looking at average annual returns over the

last ten years versus standard deviation. It makes sense to see the

multi-asset funds sitting in the top left quadrant where risk is lower

and return higher. Similarly, equity funds are sitting top right with

higher risk, higher return, while fixed interest funds are sitting bottom

left (low risk, low return).

Choosing a category and a fund to suit your investment goals

and not chasing performance is paramount to long-term success.

Looking at performance and volatility over the short term, you will

see that returns can swing quite broadly from extremely positive

to extremely negative performance. The chart top right illustrates

this by showing the best and worst quarter of the ASISA categories

over the past 10 years.

Increasing the investment period will substantially reduce volatility.

This is illustrated in the chart below, which shows the best and

worst five-year returns over the last 10 years’ quarter-ends.

Many of the worst five-year periods are still in positive territory.

It is important to establish your client’s goals to calculate the above-

inflation return required to meet them. Most of Old Mutual Wealth’s

Strategy and Target Funds have an inflation target so that investors

can meet their goals over the long term, but they can also understand

what to expect from the fund.

SAVING INVESTORS FROM UNDERPERFORMING INVESTMENTS One of the biggest challenges is to get investors to stick to their

plans, rather than chasing performance. The chart on the next page

illustrates how unit trust flows increase as the market rises, and how

investors tend to sell out after the market falls — in other words,

it shows investors buying high and selling low. Over the past five

decades, investors spent R661 billion in equity and multi-asset funds

(inflation-adjusted), which grew to R1 681 billion.

Source: ASISA

Source: Old Mutual Wealth

Source: Old Mutual Wealth

Sources: Old Mutual Wealth

WEALTH OF INSIGHTOLD MUTUAL WEALTH INTELLIGENCE

Old Mutual Wealth is brought to you through several authorised Financial Services Providers in the Old Mutual Group who make up the elite service offering.

If, instead of chasing the recent performance, investors just made

consistent contributions to their unit trusts, the same R661 billion

would have grown to R7 177 billion! These investors would have

benefited from rand cost averaging (buying more when the market

dips) and time in the market (compound growth of reinvested income).

Source: Old Mutual, SA Reserve Bank and ASISA (since 1991).