Trusting in units

CAMILO THAME Business co-ordinator thamec@jamaicaobserver.com

Sunday, February 05, 2012

FANCY dabbling in the stock market but not sure how to go about it? One way to get your feet wet is to pool your money with the savings of thousands of other people in a unit trust.

Unit trusts enable investors of all types to put their savings in a common fund, which is invested in a wide variety of instruments that may not normally be available to them as individuals.

Jamaica has ten such funds with a track record of more than 12 months, and they have all been doing well lately. In 2011, they grew by nine to 34 per cent compared to the six to 22 per cent in 2010.

Unit trusts come in two varieties, those which invest in stocks are said to have an equity component, and are both more risky and potentially more lucrative. Fixed-income funds, as the name suggests, are more solid and reliable, if less adventurous.

Products with equity components tend to do better than the Jamaica Stock Exchange (JSE) Main Index, but their returns are affected by how the stock market performs.

For instance, when the JSE Main Index took a battering in 2008, declining by 25.8 per cent, the equity-based products declined by 16 to 24.8 per cent.

Taking a longer-term view, if a person held their units up to the end of 2011, their investment would be valued at 21 to 48 per cent higher than it was at the beginning of 2008.

The fixed-income unit trust funds typically give lower returns — in 2011, they appreciated by 9.4 to 14 per cent compared to 15 to 33.9 per cent for funds with equity in them.

But for the lower-risk investor, they are much safer in that they always return growth and the rates of growth are still substantial.

For example, if an investor had put his money in a fixed-income unit trust at the beginning of 2008 and kept it there up to the end of 2011, he would have seen growth of 55 to 71 per cent.

Fund managers, contacted by Sunday Finance, said that fixed-income products did well last year as assets appreciated due to a reduction in interest rates. Also, some managers sold long-term assets that had risen in value in the short to medium term.

Unit trusts are regulated and monitored by the Financial Services Commission, while a board of trustees and a trust deed are put in place to protect investors in the funds.

The deeds for equity-based units may not limit the maximum investment in company shares, but last year equity-based units were made up of 60 to 80 per cent stocks.

Of the five funds with a stock component, Barita Investments' Capital Growth had the highest allocation to stocks, then Capital and Credit Fund Managers' Income and Growth and Pan Caribbean's Sigma Optima. On the other hand, Optima had the highest growth, then Capital and Credit's Income and Growth, and then Barita's Capital Growth.

The fund managers said that market conditions would determine the allocation of shares in the pool of funds over the course of this year.

Equity-based funds are tax free, while fixed-income products (excepting Scotia's new Premium Money Market Fund) are tax free under certain conditions — they have to be held for a period of time, such as five years.

However, while fixed-income products may become subject to tax, there is another consideration for the funds that have equity in them — the front-end load.

The front-end load is the difference between the unit price that an investor pays to buy into the fund and the price they get when they are selling units, which is usually lower. Up to Thursday, prices that investors would pay to buy units across all the funds offered ranged from 1.6 to 5.5 per cent higher than the price at which they could sell.

Although 2011 was a good year, 2012 has not started so well. Someone buying a unit in an equity-based fund on January 3 and cashing out on Friday would have lost one to 10.5 per cent of their money. By comparison, the JSE Main Index was, on Thursday, nearly four per cent down from the start of the year.

It's not unusual for the stock market to not perform well in the first few weeks of a year. Last year, the index was flat after the first month of trading and in 2010, it declined by 10 per cent during the first month.

In general, unit trust funds are typically more suited to long-term investors who may want to save to pay for big- ticket items such as a houses or their retirement.

Going forward, Pan Caribbean believes that lower interest rates and fewer Government bond issues should encourage higher bond prices and greater demand for stocks which would positively impact unit trust products; while Barita expects continued growth in its funds, but due to the level of uncertainty, the level of returns may not be as aggressive.

Capital and Credit's take is that higher awareness and the admirable historical performances (average growth of 11 to 19 per cent across all funds over the last three years) of the unit trust funds will lead to stronger client demand for these products.

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Trusting in units