Unit trusts: Are they the golden goose they are portrayed to be?

If you have Shs 100,000 [$27] and more, that you are willing to stash away, chances are you have been approached to invest in a unit trust.

Even better, you have been wooed to the investment scheme with leafy statistics, talk of risk-free returns, and a no-taxation policy on your income. All of this backed with documented real-life testimonies.

What you are not being given is a fair assessment of the collective investment vehicle, because history has taught us, that if it’s too good to be true, it probably is.

WHAT IS A UNIT TRUST?

A unit trust is a collective investment scheme that pools monies of investors together into a fund, and then divides that particular fund into priced units that it offers to investors to buy on the market.

The fund is managed by investment professionals. These investments aren’t traded on the stock market, and the price of units is linked to the net asset value of the fund, that is: the value of the fund’s assets minus its liabilities give the true value of each unit of the fund.

In Uganda as reported by Capital Markets Authority, there are six licensed collective investments schemes with over 121,000 Ugandans invested in them. As a whole, more than Shs 3.5 trillion [$ 948.2 million] is under management in unit trusts with UAP Old Mutual the largest unit trust, with assets under its management valued at over Shs 2.4 trillion [$ 661.3 million].

Collective investment schemes, or unit trusts as they are commonly known, have been a wonder in the investment sector in Uganda because they offer double-digit returns, and are not taxed: they don’t pay capital gains tax on their income.

And, their interest is earned daily; also, you can have your money back, in as little as 48 hours. These benefits have blinded investors, and prompted financial advisors to shy away from speaking about the risks associated with this investment vehicle, in the process making them market the venture as a ‘risk-free’ investment.

However, unit trusts come with a number of caveats that investors need to be brought up to speed with, namely: Unit trusts are marketed as simple to understand, but in reality, they are complicated and many unit trust investors don’t understand the risks and costs involved; neither do they understand their make-up.

As an instance, many investors don’t know that unit trusts have a life span, and the shorter the life span, the higher the costs involved. All investors are programmed to worry about is that their income isn’t taxed, and that they can access their monies swiftly.

Collective investment schemes have high costs: fund levies, platform and intermediary fees. These charges are incorporated into every unit managed, and the fund doesn’t divulge the information of these fees to the investors who are oblivious of the charges levied for the management of their money.

Trusts evaluate their units from time to time and the cost of this exercise is passed down to unit holders. Many unit trust investors in Uganda cannot definitively tell you how much they are charged for the management of their money.

When you buy into a unit trust, you are buying into that fund manager’s investment strategy. This is of concern because they invest in equities, bonds, and fixed deposit accounts, but mostly concentrate on bonds which one can buy on their own and hold without paying the fund as a middleman.

Needless to say, unit trusts can get expensive when fund managers pack units to make them lucrative. Moreover, the financial securities attached to the unit aren’t owned by the investor, but the fund manager.

The investor owns what the fund manager has allotted them — the unit. Further, unit trusts aren’t actively managed because the securities to be invested in are preselected at the beginning and last for a specified time. So, investors pay high management fees for units that are passively managed.

What’s more, in Uganda, unit trusts only invest in predictable and ordinary securities like treasury bills, bonds and fixed deposit accounts.

In the event that a horde of investors decide to sell their units in one go, and as a result ask for their money back: similar to what happened during the pandemic, where people were withdrawing hefty amounts of money daily to settle medical bills or, in the occurrence of political turmoil, which Uganda always seems to be on the brink of, the unit trust may close the fund tentatively to stop people from selling as they try to find money to buy back the units.

This creates a liquidity issue because the fund manager may have to sell property to get money to buy back units from sellers which could in turn lead to panic, and a run! Collective investment schemes are generally very ambitious and are always looking at rapid growth.

This forces them to heavily invest in advertising and marketing to get visibility; these costs are then transferred to the investor. David Chandi Jamwa, the managing director, D. Craven Consulting Limited, specialising in strategy, finance & investment, had the following reservations about unit trusts: “There is nothing like a risk-free unit trust! There are numerous unit trust funds, including those focused on listed equities, money market funds and a combination of debt and equity funds. Risks vary with the nature of the fund. Money market funds are exposed to the risk of rising interest rates, which devalue existing investments. Equity funds may potentially lose 100 percent of their investments”.

“Returns should be assessed against an investor’s benchmark. Those investors moving money from current/ savings accounts to unit trust may rightly argue that they are receiving a high return (usually more than 11 percent per annum after tax, compared to less than three percent per annum paid by commercial banks).

However, returns paid by unit trust funds are lower than an investor would receive if they invested in the medium to long-dated government bonds (which is anywhere from 14 percent to 18 percent per annum)”.

“Investors should assess their return after-tax and inflation (the after-tax real rate of return). For example, a gross after tax return of 11 percent is equivalent to a real rate of return of 6.5 percent per annum.

“In conclusion, the bulk of unit trusts schemes in Uganda are money market funds. They are an excellent vehicle for preserving investors’ wealth against the effect of inflation. They are less effective as a capital growth/ accumulation mechanism. Money market funds will not make you rich!”.

With that being said, one can directly buy and own financial securities — bonds and equities, and cut out the middle man, unit trust — and all the costs they come with, as an effective way of investing.

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