*This content is brought to you by Brenthurst Wealth
By Magnus Heystek Jr*
Apart from significant diversification benefits a Fund of Funds (FoF) solution offers a particular advantage for investors seeking tax efficiency.
A Fund of Funds offering is an investment strategy in which multiple funds are held within one fund. This type of investment structure is also often referred to as a multi-manager fund and a style of investing that provides a host of benefits to investors.
One of the largest benefits of investing in a FoF structure, is the Capital Gains Tax (CGT) implications, or lack thereof.
Any changes made within the fund do not trigger CGT implications, as the redemptions or sale of assets take place within the fund. It’s the same premise as a single Unit Trust fund redeeming shares within a fund; it simply does not trigger any Capital Gains Tax. This is a huge benefit to investors as it minimizes CGT implications in the long run.
This is also a massive benefit of the FoF structure, and allows the fund management team of such fund to make more changes where necessary, without any tax implications to the investors. One of the largest considerations for financial advisors and investors is tax efficiency, especially after recent tax increases in the annual SA budget, which is expected to increase further this year. A FoF structure however allows the investment management team to focus more on the construction of the portfolio, allowing flexibility to implement changes without worrying about the incumbent tax implications for investors, especially CGT.
Another benefit that the FoF structure offers is that it allows any changes or change in investment strategy to apply to all investors instantaneously. What this means is that the underlying equity or offshore exposure can be increased or decreased as and when appropriate, and all investors will benefit from the change at the same time. In the past, when investors were invested in individual funds, any changes required switch forms to be signed, and due to the admin intensive nature of the changes, could result in delays. However, with investors being placed in a FoF structure, any changes will now benefit investors immediately, and does not require any switch forms to be signed.
Fund of Fund options have gained popularity in the investment universe and many asset and fund managers now have such funds included in their overall offering.
Although Fund of Fund investment options have different levels of risk for investors, the nature of how it is constructed offers investors exposure to a much wider range of underlying assets thus delivering a somewhat smoother experience with fewer dramatic upward or downward spikes. It is, however, important to note as is the case with all investments, it must be viewed as a long-term commitment. This is how the best returns are delivered over time.
Investment decisions in Fund of Funds investments are typically made by an investment committee. This way information gathering is optimized and an extensive process of due diligence is completed before asset managers or particular themes are selected.
- Brenthurst Wealth recently partnered with Boutique Collective Investments (BCI) and its subsidiary, Boutique Investment Partners (BIP), to introduce a Fund of Funds (FoF) offering in 2016. The company and its partners set up three FoF structures, each with a different level of risk. BCI assists Brenthurst Wealth with the overall administration process and BIP also provides more detail into the overall asset allocation and quantitative and qualitative data for the overall offering.
- Each fund is made of different funds, with fund exposure to some notable Fund Management Companies such as Allan Gray, Investec, Stanlib, Coronation and Counterpoint.
It is strongly advised to consult a professional and qualified financial advisor before making changes to any investment portfolio as every investor has unique circumstances and requirements.
- Magnus Heystek Jr, Certified Financial Planner, Brenthurst Wealth.