Recently Ceylon Guardian Investments announced that they will be partnering with Acuity partners to launch a series of unit trusts in the Sri Lankan market. Some of the reasons stated for the launch of these products include the increase in per capita income and an increase in demand for a wide variety of investment options among investors.
Ataraxia Capital Partners believe there will be significant growth in the investment and unit trust landscape, therefore as an investor it is important to understand what unit trusts are and how they can be utilised to maximise portfolio returns.
Unit trusts or managed funds have existed globally since the early 1920s and today account for investments of over US$22.9 trillion. The first managed fund in Sri Lanka was launched in 1991 and today there are a number of managed funds issued by various providers.
A managed fund is basically an investment where investors are able to pool their money together to meet a specific investment outcome. This investment outcome is mandated by the issuer of the fund also known as the fund manager and undertaken by a sophisticated investment professional or fund manager on behalf of investors.
For example the investment mandate of the fund may be to invest in a basket of 20 shares listed on the Colombo Stock Exchange. The investment manager would then use the funds that investors have pooled together to invest in the 20 shares to meet the outcome of the fund.
As opposed to investing in a company listed on the share market that issues shares the fund itself issues units out of the investment pool and hence the name unit trust. For example, if on a given day a fund’s assets (investments) are valued at Rs.100 million and there are 2 million units on issue then each unit will be worth Rs.50. Most managed funds value their units on a daily basis, according to the market values of the underlying investments.
There are a number of benefits in using managed funds as part of your portfolio the most significant benefit of managed funds is that they allow you to diversify your portfolio simply and effectively. You may only have to pay the professional fund manager 1 – 2% a year to invest your funds and manage a broad portfolio, eg. across 20 shares as opposed to a brokerage fee to buy and sell those shares each time you trade.
When looking at which unit trust or managed fund to invest, the key thing to look at is the investment rationale of the fund and whether it suits your investment criteria. The trend globally in the managed fund market has been to move away from what are known as active funds that look to outperform a benchmark index such as the All Share Price Index or Milanka Index to more passive fund managers who look to simply track an index or a series of investments. This is due to the fact that over a 1, 3 and 5-year period only 12% of fund managers beat their relative benchmark index.
(The writer is CEO of Ataraxia Capital Partners, an international fund manager which trades in global equities and fixed income. He could be reached at email@example.com).