Only 25% of South African unit trust funds outperformed the market

Schalk Louw, a portfolio manager and strategist at PSG Wealth, revealed that only 25% of South African unit trust funds outperformed the market.

A unit trust is a type of collective investment where money from many different investors is pooled together.

This money is then invested in assets by a professional fund manager. They can buy any assets, including stocks, bonds, and property, in line with their mandate.

Historically, unit trusts made it easy for ordinary people without much financial knowledge to invest in the stock market.

Instead of investing directly in the market through a broker, they could simply give their money to a unit trust, and the fund manager will do all the work for them.

In South Africa, unit trusts started to emerge in the sixties. The pioneers included the Sage Fund and Sanlamtrust.

It gained momentum in the eighties as unit trusts diversified beyond general equity funds into specialised sectors, gilts, and money markets.

Unit trusts, which are actively managed, faced a new competitor with the launch of passively managed Exchange Traded Funds (ETFs).

ETFs have disrupted the landscape by offering a cheaper, more transparent, and faster way to trade.

Many ETFs track the market or a specific market segment, which means that an active fund manager is not needed.

Investors questioned whether it was worth paying a fund manager a 1.5% to 2% fee to try and beat the market when you can pay 0.1% to 0.4% to simply track it.

Unit trust fund managers were firmly focused on beating the market as they had to justify charging their customers higher fees than ETFs.

The war between actively managed unit trust funds and passively managed ETFs is now in full swing, with advocates for both sides slugging it out.

Only 25% of South African unit trust funds outperformed the market

Schalk Louw recently revealed that of the 70 South African unit trust funds with a SA General Equity mandate, only 25% outperformed the market.

For this comparison, Louw used the Johannesburg Stock Exchange (JSE) All Share index, which was up 52.7% up to yesterday’s close over one year.

He said that the South African unit trust funds’ returns ranged from 69.3% for the top performer to 10% for the weakest.

“This clearly illustrates the wide dispersion that can exist among funds with the same mandate, particularly if they lack exposure to precious metals,” he said.

Many experts, including the late billionaire investor Charlie Munger, who slated the traditional fund management industry.

He viewed the majority of it as a parasitic drain on society, where high fees were charged for performance that rarely justified the cost.

Munger believed that the stock market is efficient enough that most people, even professionals, cannot beat it.

He often pointed out that by the time you pay for a fund manager’s salary and their swanky office, the fund is almost guaranteed to underperform a low-cost index.

However, there are a handful of very good funds which have consistently outperformed the market and which add value to clients.

The challenge for investors is to identify these funds and trust that their historical performance will continue.