Investors often weigh up the benefits of buying shares directly against the ease and certainty of investing in Unit Trusts – which of these investment strategies is likely to yield the best returns over time?
Stock Picking – Doing it Yourself
With online share trading offered by all major banks, at lower rates than most brokers charge, many investors are opting to buy their own shares. Some of these investors may see brokers as unnecessary and expensive, believing that they have the required knowledge of the markets to invest in lucrative shares.
While the commission charged by online share trading websites and banks is lower than that of brokers, investors should be certain about the shares they select, realising that they could make a loss if the markets move differently than they expect.
Another challenge faced by investors who buy their own shares is picking the right stocks. For example, Mr Price shares are extremely popular at the moment, having enjoyed a great run over the past three years. However, the market capitalisation of this share is the same as that of much larger companies, such as 6 of the biggest construction firms listed on the JSE – is this share really an excellent buy at current prices?
Market capitalization (or market cap) is the total value of the issued shares of a publicly traded company; it is equal to the share price times the number of shares outstanding. As outstanding stock is bought and sold in public markets, capitalization could be used as a proxy for the public opinion of a company’s net worth and is a determining factor in some forms of stock valuation. Preferred shares are included in the calculation.
Unit Trusts and LISPs – Investing in Managed Funds
For investors who find the prospect of picking stocks themselves intimidating, or are concerned about the risk of losses, Unit Trust investments are often a better option. By investing in Unit Trusts through a LISP (Linked Investment Service Provider), investors can place their capital in a fund or funds that hold shares, government bonds, cash and other assets across a broad range of sectors.
Unit Trusts are managed by professional fund managers who select the specific shares and equities which the fund invests in. Although returns on Unit Trusts are not guaranteed, having a fund manager does reduce the risk of losses.
Comparing Shares and Managed Funds
The graph below illustrates the performance of the JSE over the past three years, compared to three actively managed funds investing in specific JSE-listed companies over the same period. As the graph reveals, the actively managed funds out-performed the JSE during this time. It may be that despite higher brokerage fees, managed trusts will provide higher returns for investors over the long term.
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