Private share portfolios vs. unit trusts

*This content is brought to you by Overberg Asset Management

By Gielie Fourie* 

There is an ongoing debate on whether one should invest in the stock market through private share portfolios (PSPs) or unit trusts (UTs) or similar pooled investment vehicles. We all know what UTs are – their massive advertising campaigns take care of that. PSPs are lesser known. PSP investing involves a bespoke investment portfolio in which shares are held in the client’s name and are bought and sold on behalf of the individual client by the asset manager. The asset manager will invest directly in the market and will avoid investing through middlemen, like UTs. Asset allocation and share selection within the portfolio can be customised to suit the client’s precise risk profile.

Gielie Fourie

PSPs are tailored to each investor’s unique needs. An asset manager with 1,000 investors will have 1,000 segregated portfolios, one portfolio for each investor. A young investor will normally prefer an aggressive growth portfolio, while an older investor will require a more conservative portfolio with a high dividend yield. UTs and other pooled investments follow a one-size-fits-all approach. Irrespective of their needs, the funds of, say 1,000 investors, both young and old, will be invested in the same pool. If you are serious about your investment, this broad approach does not make sense.

PSPs are actively managed, while UTs tend to be less actively managed. It stands to reason that PSPs must be actively monitored and managed. PSPs are agile. They can act quickly without moving the market. They can buy shares in small cap and big cap companies alike. UTs on the other hand follow a more passive approach. Managing a big pool of investments results in big purchases that may move the market. This makes it a problem to invest in profitable small cap companies. A UT’s universe of investable shares is smaller than that of a PSP.

PSPs can provide personalized services to their clients. On a quarterly basis consultants will contact their clients to discuss their portfolios and needs. It means that consultants must work long hours and travel a lot to service their clients. Clients are also able to communicate directly with the asset manager. Communications with clients are frequent and face-to-face. UTs are more passively managed with little or no personal interaction with clients. Asset managers rarely, if ever, interact directly with clients. Communication with clients is often done through the media.

The fee structure of PSPs is transparent, simple and flexible. Total fees should not exceed 1.5% per annum and are flexible for larger portfolios. This is not the case with UTs. There are many middlemen all charging fees, which include: custodial fees, audit fees, legal fees, trustee fees, distribution and marketing fees, platform fees and performance fees. UTs will quote their Total Expense Ratio (TER), but the TER often does not include all the fees mentioned above.

With PSPs capital gains tax (CGT) is levied every time a share is sold. Where applicable, clients will pay CGT every year. Clients can make full use of their annual CGT exclusion (currently R40,000.00 for natural persons) and locking in relatively low CGT rates. With UTs the scenario is very different. CGT is only levied when investors sell the UT. The client is exposed to losing several of his annual CGT exclusions. This means that CGT may not be paid for several years – but the sting is in the tail. When the client sells his UT after several years, he can be hit with a massive CGT liability.

The global trend is more transparency for investors and consultants. Because of the transparency provided by PSPs, there is a growing appetite to invest through PSPs. The cost implications have been highlighted above. Over the life of an investment the cost differential between PSPs and UTs can be significant. If you want to invest in a PSP, you are welcome to consult one of our highly qualified consultants. Consultations are free, even if you decide to invest at a later stage, or if you decide not to invest at all.

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