Unit Trusts, a different type of chama
Did you know that a unit trust is just a chama, only that it is of a different kind?
Just like a chama, it brings together individuals to pool resources and invest together. Unlike the typical chama though, it does not start with friends, family, and other groups of people known to one another coming together to invest.
Unit trusts work differently. A fund manager sets up a unit trust and invites prospective investors to join and put in their money to be invested for them. Unit trusts are also more tightly regulated.
Erastus Sifuma, an investment and private wealth advisor, explains that unit trusts are formally structured to enable individuals access investment opportunities, which are managed on their behalf by professional investment managers. This delivers reduced risk, since individuals can diversify their investment, compared to if they went it alone.
The fund manager can then invest the pooled funds in a variety of asset classes: cash and demand deposits, fixed deposits, securities listed at the Nairobi Securities Exchange, unlisted securities, government securities, immovable property and off-shore investments.
The Capital Markets Authority (CMA), which regulates investments, strictly prescribes where fund managers can invest. This, the authority argues, ensures that what is marketed to investors reflects actual asset holdings and attendant risk, while reducing possible exposures from concentrating on specific assets. The regulations are however currently under review to enhance flexibility and encourage risk-based approach to investments as opposed to prescriptive model.
The CMA has approved 24 Collective Investment Schemes that run 92 unit trust funds in Kenya. Investors have a choice of different kinds of funds to invest in: Fixed Income Funds, Equity Funds, Managed Funds, Balanced Funds, Income Funds, Growth Funds, Wealth Funds, Diversified Funds, Iman Funds, East Africa Funds and Special Funds, each with special attributes.
“The most popular unit trust is the Money Market Fund, accounting for about 80 per cent of the funds in unit trusts. This is because it is less risky and investors can easily access their funds. The other types have potentially higher rates of returns. The Equity Fund, on the other hand, delivers better returns but is more volatile,” explains Erastus. He adds that in 2019, whereas investors could net up to 30 per cent from investing in an Equity Fund, it could only net about 10 per cent in a Money Market Fund.
The CMA’s quarterly statistical bulletin for the quarter ended December 2019, had the CIC Unit Trust Scheme holding the largest value of assets under management in Kenya at 27.51 per cent, with Britam Unit Trust Scheme and ICEA Unit Trust Scheme holding 8.72 per cent and 8.01 per cent respectively.
Experts say a prospective investor’s choice of fund manager boils down to their objective. It could be putting away a little something for emergency, or saving for a future goal or preserving funds for future use.
“Investing is about the future, which is uncertain. The only way to make investment work is by choosing the best option for meeting the objective. Sometimes, safety can be better than increasing the money,” Erastus explains.
The CMA expects unit trust personnel to disclose all this information on risks vs rewards to prospective investor, besides conducting a structured and comprehensive risk assessment to determine risk profile before recommending where to invest.
With an investment objective nailed and the fund that is likely to deliver it identified, the next big task is for prospective investors to decide which fund manager to entrust their investment.
Peter Anderson, the Group Managing Director, Asset Management, at Old Mutual warns that unless the prospective investor is experienced and understands the market, they should seek advice from a financial advisor. All firms running unit trusts have advisers who can help provide guidance.
“In a nutshell, seek advice what is the best way, listen carefully, understand whether it fits your circumstances and then move accordingly,” says Mr Anderson.
For those who choose to go solo in this decision, a number of factors need to be considered. The number of years that a fund manager has been in business could give an indication of structures for safeguarding investors’ money. Then there is its track record of returns.
Also, size does matter in determining earnings from a unit trust, says Seth Andika, of CIC Unit Trust Scheme.
“The bigger the fund the higher the ability to diversify. Diversification help the fund mitigate inherent risks within a particular asset class. In addition to this, there is negotiating power that is enjoyed by all pooled funds, generally getting preferential rates with placing agents which is shared equitably to all the unit holders,” adds Seth, who explains that the firm has a research and investment team to ensure all decisions are sound and interests of unit holders are protected.
Prospective investors can scour dailies in which unit trusts are required to periodically publish historical and current rates of return. These can give a feel of the fund’s performance, as well as where and how money is invested and risks involved. This, they can compare across unit trusts.
Erastus argues that a fund that has a reasonable rate of returns that is consistent is better than one with high rates that are volatile.
Prospective investors are also expected to familiarize with how a unit trust works, the fees, as well as rights and responsibilities. They should also resist pressure from unit trust sales people.
“However, do not invest before going to visit the provider. Read online for feedback. Do they do what they promise to, for instance sending statements and information on markets?” Erastus advises .
Prudent professional management, CMA states, largely determines performance of unit trusts. This has led the authority to emphasise involvement of the multi-disciplinary investment committee at management and board level to avoid cases of investment managers solely making decisions.
The regulatory framework has in-built systems for protecting the investor. Besides the fund manager, other structures are: custodian, trustee and regulator.
Today, unit trusts only require as little as KSh500 to begin investing, making it accessible for all investors, irrespective of their socio-economic status.
“Unit trusts used to have very high entry levels. About ten years ago you probably had to have quarter of million shillings or so to enter. Nowadays, companies allow you to enter with KSh500 shillings and be invested in the best companies listed in the Nairobi Securities Exchange. You can essentially become an equity owner in those companies,” Mr Anderson adds.
Even after putting in the investment, however, the role of the investor does not end. There is some continuous role to be played throughout the term of the investment.
“Do not just sit back. Check in regularly. Spend at least five minutes every month following up by calling and consulting. If in doubt, ask. Book an appointment with fund manager to be explained to,” Erastus advices, adding that maintaining interest over time builds knowledge.
Seth, from CIC Unit Trust Scheme, adds: “An investor cannot be passive per se. Ability to interpret statements to check if they are making money is important. We have a self-service portal for tracking daily return”.
The advantage of unit trusts is the option of putting in investments bit by bit over time, to benefit from advantages of compounding.
All said and done, CMA warns that for unit trusts, like other investments, there is no guaranteed returns; neither is there certainty that invested funds will not be lost. The authority counsels investors to be wary of promises of spectacular profits and returns.
“In investment, there is no guarantee of returns. No one can be sure of that,” concurs Erastus.