Four factors to weigh up a unit trust’s performance
If a unit trust
is performing well, you need to ask yourself if it’s because the fund manager is an investment genius or they just concentrate on stocks that tend to perform well anyway.
There are a number of different factors in stock picking that have an effect on returns…
The expected rate of return depends on a stock’s sensitivity to movements in the wider market. This sensitivity is known as beta.
If a stock has a high beta, it’s moves up more than the market when the market is rising and moves down by more than the market when the market is falling, Cris Sholto Heaton in Money Week
If a fund manager buys into undervalued stocks, you’d expect their returns to be higher than more expensive ones.
Smaller stocks are riskier and investors demand higher returns as a result. So you’d expect their returns to be higher than larger stocks.
This is down to investors buying into stocks that are rising in value. By following the investment crowd, you’d expect stocks to perform well.
How to use this information when looking at unit trusts
If you can understand these factors and the effect they have on an investment’s performance, you can try to see why it performed the way it did.
For example, if a fund manager has beaten the JSE Top 40 Index, it could be down to skill. But they could have invested heavily in smaller stocks and value stocks instead.
If this was the case, you could have earned the same returns investing in exchange traded funds that invests using this criteria, and excluded the need to pay for high management fees.
Before investing in a managed fund, try to work out if it’s down to the fund manager’s skill or if it’s down to the stocks he’s investing in. If it’s down to the types of stocks he invest in, you could find a cheaper way to invest.
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