Independent analyst Johann Biermann has crunched the numbers, which show how difficult it is to pick a winning unit trust.
He rounded up a couple of South Africa's biggest funds, and then calculated what your performance would have been if you invested every year in the previous year's winner.
If you invested in South Africa’s top-performing unit trust each year since 2015, your investments would have shrank by 7.7% by end-January. Meanwhile, the return from the JSE's All Share index was 16.5%.
It shows just how detrimental it is to chase winners, says Biermann.
For example, 2016’s top-performing unit trust, the Investec Value fund, delivered growth of more than 62% that year. But the very next year, the fund lost 11.1% – while in the same year, the JSE's All Share index was up 21%.
Meanwhile selling out of the worst-performing fund in 2015, the RECM Equity fund which suffered a loss of 31.4%, would have meant that you miss the next year’s 43% growth – while the JSE's all share index only grew by 2%.
It is relatively common that unit trusts which outperform will start to underperform, says Biermann.
“This is because their investments will start looking expensive after strong growth, and investors will start selling out of them and switch to cheaper shares.”
The difficulty of picking winning unit trust shows why an index-tracking fund makes sense as a core investment, says Gregg Sneddon, a certified financial planner at The Financial Coach in Cape Town. An index fund simply tracks an index of shares – the Satrix 40 index fund will for example only invest in the biggest 40 shares in the market.
“At least you know your money will perform in line with the market – at fees that are far lower than active unit trusts.”
Actively managed unit trusts charge higher fees because they pay fund managers to pick investments.
But Sneddon says South Africans should probably own both active and passive unit trusts.
“The local share market is different from Wall Street – there are still a lot of inefficiencies that active unit trusts can exploit.” Biermann agrees.
So, for example, if you invested in the Satrix 40 in 2015, you would have had minimal exposure to mining shares, which dropped out of the index because their prices tanked. You would have missed the strong rally in some of these companies before they were included in the index again – but not if you were invested in a savvy active unit trust, says Sneddon.
But when you choose an active unit trust, make sure that it doesn’t look like the index, he warns.
“Many supposedly active funds are closet index funds. South Africans are paying active fees for unit trusts that basically just reflect the market.”
Do a bit of research to find out what a unit trust invests in. You’ll find the top ten holdings of each fund on unit trust fact sheets, which are published on a fund manager websites.
See below an example of the Allan Gray Equity Fund fact sheet:
Make sure that the top holdings aren't just replicating an index. Sneddon singles out the Kagiso Equity Alpha fund as a good example of an active fund that can be blended with an index fund to get some good, real diversification
It's in choosing a unit trust most suited to your needs that getting financial advice can make a big difference, he adds.