Investing: The Collective Good?

People can spend their hard-earned money in many different ways, or like my wife (whom I love dearly!) they can spend it all on shoes.

Alternatively one can choose to save for the future and invest, and the most common way this is done is via Collective Investment Schemes (“CIS”), which provide a simple and easy way for people to access global markets across a range of different asset types e.g. equities, bonds, money market instruments, property and commodities.

The rules governing CIS and managers thereof (think Allan Gray, Coronation, Investec etc) are laid out in the Collective Investment Schemes Control Act (“CISCA”), and there are some harsh penalties for non-compliance, including prison time if they’re not careful. The list of approved CIS can be found here.

You may not know it but you probably already invest in CIS as part of your pension funds, Tax Free Savings Accounts or your child’s education funds (if you’re not sure what these are then feel free to contact me.)

CIS allow several different investors to pool their money into a portfolio and own a proportionate stake in the CIS based on how much they contributed. Unit Trusts, the increasingly popular Exchange Traded Funds (“ETFs”) and Hedge Funds are all types of CIS, as they allow smaller investors who may not have the time, money or expertise to gain access to asset classes which may be otherwise difficult to purchase and hold in small denominations.

Another advantage of CIS is that they reduce investment risk and volatility through diversification, which is to say that a CIS portfolio made up of different, uncorrelated investments should, on average, yield higher (inflation-beating) returns and pose a lower risk to loss of capital than investing in any individual asset within that CIS.

CIS are flexible as you can invest lumps sums and/or regular monthly contributions, and their performance can be easily monitored as they are liquid, priced daily and also rated by companies such as Fundhouse and Morningstar.

However, as with all forms of investing, one must be aware of the associated risks and costs of CIS. They are typically more suited for the medium to long-term investor, and your capital is at risk should the underlying investments fall in value.

CIS may come with an upfront fee (AVOID!!) as well as a fixed or performance-based Annual Management Charge (“AMC”), which would be included as part of the CIS’ Total Expense Ratio (“TER”). The TER is a measure of the total costs associated with managing and operating a CIS to the investor; typically these are much lower with passive style ETFs than actively managed Unit Trusts or Hedge Funds. The size of the TER is important to investors as it diminishes the CIS’ returns, however an active asset manager (remember Allan Gray, Coronation, Investec etc?) would argue that they can outperform and generate higher returns, thus justifying the higher TER. The debate about active versus passive investing rages on…but I’ll save that for another article!

Never pay an upfront fee to invest in a CIS as this is typically used to pay commissions to salesmen who distribute products and may not be acting in your best interests. There is a large universe of CIS to choose from so it may be appropriate to obtain fee-based independent financial advice to ensure you invest in the CIS that is suitable for your risk appetite, and meets your financial needs and objectives.

Posted in Blog, Investments.