Unit trusts remain a popular investment option for local investors, as they offer a convenient and accessible entry point into the global marketplace.
The variety offered across asset classes and sectors provides diversification benefits, while low minimums allow investors to start investing with relatively small amounts.
“These low barriers to entry ensure investors can participate in markets by accessing a wide opportunity set that would otherwise prove difficult or expensive to access individually,” says PSG Wealth head of fund solutions Henko Roos.
Allan Gray chief investment officer Duncan Artus adds: “However, the significant market volatility experienced in the third quarter of 2024 has highlighted the need for a carefully constructed, diversified portfolio of unit trusts.”
Roos explains that investing can be an emotional journey, especially for retail investors. “Navigating the market goes beyond just picking the right unit trusts, as investors also need to understand the inherent risks involved with investing in local and global markets,” he says.
“Investors must be honest about their tolerance for volatility and potential drawdowns, with multi-asset unit trusts a popular option due to the diversification benefits they offer. They cater to a range of risk profiles, allowing investors to choose an option that aligns with their comfort level.”
Roos highlights the need to stay the course during periods of volatility, because even the best-performing unit trusts can experience periods of underperformance.
“Don’t panic and sell at a loss. It is important to stay invested and ride out temporary market dips, according to your financial goals and your investment horizon and strategy.”
This advice rang true for global investors when Japanese shares experienced a remarkable one-day crash and subsequent recovery in September.
“This drop happened in response to a larger than forecast rise in short-term interest rates by the Bank of Japan,” says Artus.
“Many analysts also attributed it to the unwinding of the long-running yen carry trade, where investors borrow in yen and invest in higher-yielding international assets, but it is not yet clear if other factors contributed as well.”
Artus says the Tokyo stock price index fell 12.2% in a single day, and the better-known Nikkei index had one of its greatest intraday falls since the crash of 1987.
“This led to a sharp sell-off across global equities, including the FTSE/JSE all share index (Alsi). US equities also had another large intraday sell-off on September 6.”
However, though unnerving in the short term, the volatility in global equities can provide opportunities for patient long-term investors, says Artus.
Investing can be an emotional journey, especially for retail investors
“If investors sold out in the dip, they negated the potential to benefit from the subsequent recovery, which affects returns in the long run,” says Roos.
For instance, the Nikkei bounced back 10% the day after the sell-off, with the Alsi recovering and reaching a new record high of 87,802 in September. The S&P 500 also hit consecutive record highs as US markets rebounded.
In their search for lower volatility and higher risk-adjusted returns, investors have also increasingly shown a preference for fixed income funds, says Michael Dodd, senior fund analyst at Morningstar South Africa.
“The market share of Morningstar global broad category groups for the South African unit trust market has shifted in recent years, with fixed income funds having grown their market share to 24% of the local unit trust market and seeing consistent positive net flows in every year of the past decade.”
Amid a dynamic risk landscape, with rising geopolitical risks and diverging economic growth prospects across the globe, investors must consider numerous factors when selecting unit trusts to include in their portfolios and execute their investment strategy.
“Ultimately, patience is key and building wealth takes time. Unit trust investors must resist the urge to withdraw funds before their investment horizon to benefit from the power of compounding, where your returns generate even more returns over time,” says Roos.
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