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How to choose a Unit trust or ETF

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How to choose a Unit trust or ETF

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Time and again I see the same pattern. A first-time investor musters the courage to open his or her first investment account – normally a tax-free savings account, retirement product, or share trading account. And then he/she gets as stuck as a sports car in the mud when needing to choose the underlying funds for the account. Let’s face it, the choice is overwhelming for new and old investors alike. So, how do you choose an ETF or unit trust fund from more than a thousand funds?

In a previous post we discussed what asset allocation is and why it’s really important, even more important than chasing low fees and the minimum tax. It’s time to figure out how to practically implement your asset allocation and choose the right fund for your risk profile.

Your step-by-step guide to choosing a fund

To end up with the fund/s that’s right for you, you’ll need to do the following:

  1. Go through the 5-minute risk profile exercise.
  2. Adjust your risk profile to suit how long you’re investing for.
  3. Get to know the ideal asset allocation for your risk profile.
  4. Narrow your options down to a shortlist of only those funds that fit your risk profile/ ideal asset allocation.
  5. Choose two or three funds from your ‘shortlist’.

1 To the rescue for asset allocation: the risk profiler

As flawed as they all are, a risk profiler or risk profiling questionnaire is still better than nothing to guide you towards how your asset allocation should look.

Some are better than others. I know Easy Equities, for example, provide a risk analyser on their website, but I’d personally rather use the industry best practice risk profiler, the Oxford Risk Rating questionnaire. It will take you less than 5 minutes to complete it and to be categorised as one of the five risk profiles. You could also use any other risk profiler you may find online, as long as it has 5 gradients of risk taking, from conservative (low risk taker) to aggressive (high risk taker), as the local industry generally uses five categories. Other countries such as New Zeeland use only 3 categories, but when using one of their risk profilers you’ll battle to match your risk profile with a local fund.

Most local risk profilers categorise investors as one of five types, with naming conventions that differ from profiler to profiler, but generally look something like this:

  • Aggressive (high risk taker)
  • Moderately aggressive (medium to high risk taker)
  • Moderate (medium risk taker)
  • Cautious (low to medium risk taker)
  • Conservative (low risk taker)

2 Adjust your risk profile to suit how long you’re investing for

The Oxford risk profiler assumes that you’re a long-term investor, in other words investing for financial freedom and beyond early retirement. If you’re investing for some other goal and want to cash in your money within the next 10 years, you may need to ‘tone down’ your risk profile to suit a shorter time than 10 years. Depending on your investment term, you shouldn’t take on more risk than the following:

You want to cash in within:You can afford to take:Adjusted risk profile
7-10 yearsMedium to high riskModerately aggressive or lower
5-7 yearsMedium riskModerate or lower
3-5 yearsLow-medium riskCautious or lower
1-3 yearsLow riskConservative
1 yearAlmost no riskForget this whole asset allocation exercise – just invest in the money market

Once you have your ‘true’ and final risk profile – determined by both your investment temperament and your investment term – you can start looking at your ideal asset allocation.

3 From risk profile to recommended asset allocation

Each adviser or company will link asset allocation to your risk profile in a slightly different way and dish up a different blend of asset classes. Below is one example of what the recommended asset allocation bands (what % in each asset class) could look like.

Risk profileAlso calledRecommended equity allocationRecommended property allocationRecommended bond allocationRecommended cash allocation
AggressiveHigh risk taker80-100%0-20%0-10%/td>0-10%
Moderate aggressiveMedium-high risk60-75%0-25%0-15%0-10%
ModerateMedium risk40-60%0-25%10-20%10-20%
CautiousLow–medium risk10-40%0-25%20-40%10-30%
ConservativeLow risk0-10%0-10%30-70%30-50%

Some account providers don’t categorise their funds according to their risk profile but instead talk about their equity allocation. In that case, we’ll have to translate the language on their website as follows:

Risk profileAlso calledEquity allocation
AggressiveHigh risk takerEquity
Moderate aggressiveMedium-high riskHigh equity
ModerateMedium riskMedium equity
CautiousLow–medium riskLow equity
ConservativeLow riskNone. Income/ Interest bearing / Fixed interest instead

For each of these asset class blends, the return experience would be completely different. The more aggressive, high-risk portfolios with mostly equity has the best chance of strong inflation-beating returns over the long run, but in the short term the portfolio value could go up and down a lot. On the opposite end of the spectrum, the conservative portfolio should provide a much smoother ride with relatively small fluctuations in the value of the portfolio but ultimately not such strong returns. Unfortunately, there’s no such thing as a top-performing portfolio without taking on risk.

Armed with all possible naming conventions for the category of funds you’re looking for, it’s time to putter around on your account provider’s website to find out which funds they offer in that category.

4 Get hold of the list of funds that fit your risk profile

There are two main types of funds in our industry: unit trust funds and exchange traded funds (ETFs). Some account providers have an investment platform from which you can choose both ETFs and unit trusts, such as Satrix and Sygnia. Some offer only unit trusts currently, like the Allan Gray platform. Generally, you’ll find more choice among the unit trusts, but that might be part of your problem – just too many funds. I’ll do a separate post focusing solely on the difference between ETFs and unit trusts – both collective investment schemes. For now, I’ll assume you’ve already opened your account with one of the following three popular product providers:

Allan Gray
Easy Equities
Satrix

How to choose a fund from the Allan Gray platform

It’s not that easy to find, but here’s the link to what Allan Gray offers on their platform. No mention of risk profile is made on the page, but there’s just enough choice to provide some diversification without a new investor being overwhelmed by too many funds. TFSA investors cannot invest in funds with performance fees or only commodities, so it’s important tick the second box under “Only show” to eliminate funds that don’t qualify. Then tick either “Equity”, “High equity”, “Medium equity”, “Low equity”, or “Income” to filter down to only the funds that are relevant to you.

How to choose an ETF from Easy Equities

Easy Equities provides the following ETF finder page to help you filter out only the ETFs you want. The “Risk profile” section in the left side bar of the page would be a dangerous way to approach your search. For example, when you tick “Moderate”, ETFs with 100% equity exposure pop up on the shortlist. A very bad idea for someone with only a moderate risk profile. The way Easy Equities classifies some funds here is not industry standard.

Therefore rather use the “Asset class” option on this page and tick:

  • “Equity” if you have an aggressive risk profile
  • “Mixed allocation” if you have a medium-high risk, medium risk or low-medium risk profile
  • “Fixed income” if you have a low risk profile.

With Easy Equities’ current fund offering, you’ll get a shortlist with a wide range of funds under “equity” and “fixed income”, but only two funds under “mixed allocation”. The Newfunds Growth fund suits the medium-to high risk profile and the Newfunds Protect fund the low-medium risk profile. Medium risk investors would need to pick both these fund to get a blend that suits their profile.

How to choose an ETF or unit trust from Satrix

With Satrix you have a range of ETFs and low-cost unit trusts to choose from, all listed on the Satrix products page.

  • If have an aggressive/ high risk profile, choose “High” on the “Risk” dropdown menu. A long list of equity and some property funds will appear.
  • If you have a moderately aggressive/ medium-to-high risk profile, choose “Medium” on the “Risk” menu and “Multi asset” on the “Asset class” menu. Currently only the Satrix Balanced Index Fund appears on the shortlist.
  • If you have a Cautious/ low-medium risk profile, choose “Low” on the “Risk” menu and “Multi asset” on the “Asset class” menu. Currently only the Satrix Balanced Low Equity Index appears on the shortlist.
  • If you have a moderate/ medium risk profile, you’ll have to allocate part of your investment to the Balanced Index Fund and part to the Balanced Low Equity Index Fund for a moderate blend between the moderately aggressive and the cautious fund on the Satrix short list.
  • If you have a conservative/ low risk profile, leave the “Risk” menu alone and only choose “Fixed interest” on the “Asset class” menu. Currently three income funds make it to the shortlist.

5 Decision time – pick two or three funds from your shortlist

If your account provider’s shortlist has only one fund on it that fits your ideal asset allocation, perhaps only one will be good enough. If it’s a multi asset/ mixed allocation/ balanced fund, just check first that the fund does in fact include some global/offshore/international assets. If not, like the Newfunds MAPPS Growth or Newfunds MAPPS Protect funds from Easy Equities, allocate some of your investment to the only local fund on the shortlist and some to one of the global funds offered by your account provider – for some offshore diversification. (On the Easy Equities ETF finder page of you will find the “Global” category under the “Regional” dropdown box.) The more conservative your risk profile, the less should be allocated to global equity, as the combination of being in the equity market and being exposed to rand volatility will increase the ups and downs of your investment. Conservative investors may want to leave out global funds altogether.

If your shortlist is quite long, picking two (maximum three) is good enough. Many of the funds on the list will look very similar anyway. Be careful of duplication. For example, on the Easy Equities platform, the 1nvest MSCI World ETF and the Satrix MSCI World track the exact same index and combining these two would bring zero diversification benefits. The only way to find out how similar funds are is to carefully study the minimum disclosure document (also called the MDD or fund fact sheet). Have a close look at the % in each asset class, also called asset allocation or asset breakdown on the disclosure document, and also at the top holdings in the fund. You’re only getting the diversification benefit of choosing two or three funds instead of one if the funds hold substantially different assets.

If you have several funds on your shortlist, it’s also a good idea to choose at least one low-cost index tracker (they exist for both ETFs and unit trusts) to ensure an overall lower-fee portfolio. You will recognise these funds by the low total investment cost on the minimum disclosure document (always less than 1% p.a.).

Kristia van Heerden from Just One Lap is also a good source of ETF reviews/research if you want a human voice talking about what’s actually inside the fund. (One has to look at a lot of disclosure documents to read them with ease and find exactly what you’re looking for within seconds.)

Probably the worst grounds to choose a fund on is its past performance. Past performance is as empty as the whispered sweet nothings of a stranger on the dancefloor just after midnight. You have no guarantee that you’ll ever see that performance again. Often last year’s worst performers become the following year’s best performers. The opposite is also true. And sometimes a poor performer can have several bad years in a row.

Your fund choice doesn’t have to be perfect

Maybe you’ve been though the whole risk profile process, checked out your asset allocation and what your account provider offers to match it, and you’re still left with a shortlist with too many funds. Don’t worry too much about which ETF or unit trust you end up with. Investing is not like a day at the racecourse where the winning horse is clear. Some years certain funds are ahead, other years it’s someone else’s turn. It’s not that your fund choice is unimportant, it’s just not as important as getting the following right:

  • Opening an account and getting started
  • Using a tax-free account or retirement annuity tax wrapper
  • Having some low-cost funds in your mix
  • And most important of all, being in a fund with the right asset allocation for the amount of risk that you can afford to take.

Please don’t let the problem of too many funds let ‘analysis paralysis’ set in. If you’ve done all of the above right, you’re in a far better place than anyone doing nothing because he/she is feeling overwhelmed by the confusing world of investing. You’ve started and you’re on the right track.

Article reposted with permission from Go Freedom.



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I’m Lizelle and I have no intention to retire from a working life. Only from my corporate life. I’ve been down many paths over the past 25 years: actuarial technician; investment performance analyst; product manager; hedge fund manager; client experience designer; finance forum owner; communication specialist; coffee stall owner; and Nia teacher (much fun). And I've been on a few sabbaticals, being a strong believer in proper breaks. I’ve been a salaried worker and a freelancer, and definitely prefer the latter. So, my next goal is to up-skill, cross-skill, invest in how I see my future self and save up some reserves, so I can return to the freedom of flexible work – for good. To me, financial freedom is a process; it's not an absolute destination.

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