• Tonia Pavlou – Credit Analyst, Sygnia

How to get off the financial rollercoaster

For most investors, trying to navigate the South African unit trust market is like shopping in a foreign supermarket stocked with products they don't recognise, labelled in a language they don't understand. There are now almost 1 600 funds to choose from, and it’s not surprising that many investors don’t know where to start.

Even for people exposed to business and finance, the investment world can present a large, confusing universe.

Delivering solutions that investors not only need, but can understand and relate to is important.

Understanding client needs

The overall volatility of equity markets and the poor performance of local stocks over the last few years have hurt some investors. Many investors now want a financial vehicle that will help them avoid this uncertainty and deliver stable returns.

This is particularly true for investors who are approaching retirement or have already retired. They want something that will deliver a consistent, inflation-beating income stream, with a low probability of capital loss.

At the same time, younger investors, who may be new to markets, have been so disappointed by equity returns that many have stopped saving altogether. Having no longer-term reference, they are understandably disillusioned. Although it would be best to stay the course and trust equity markets, it is a hard sell given current market conditions. Nonetheless, abandoning saving comes with a serious opportunity cost.

Consequently, investing in a product that provides more stability and certainty over the short term seems the ideal route for anyone scared of volatility.

Delivering a solution

Having established what both existing and new investors need, the challenge is to deliver the solution in a way that they can relate to. It may be obvious to asset managers what a multi-asset income fund does, but how do we express it in a way that makes sense to investors?

Fortunately, everyone understands debt. People make use of credit cards, borrow from banks to purchase cars, and they pay off home loans. People understand that debt repayments are made regularly, and they appreciate that whoever is lending the money generates a profit by charging interest.

The same principles apply to the new generation of Enhanced Income Fund returns: the fund invests in debt instruments issued by credible entities, including banks and large corporates that pay regular interest. Institutions sell “debt instruments” to investors such as asset managers as a way of borrowing money, and they generally pay handsome interest rates. This, in turn, allows the asset manager to pass that interest on to investors in their Enhanced Income Funds.

This form of investing ensures that investors earn a stable income stream with greatly reduced volatility in their invested capital value.

When these factors are combined, they offer a product that is transparent, and simple, delivering what investors are looking for in the current market environment – certainty.

What to look out for

  • Manager Fees: lower is better,