Unit trusts are a tried-and-tested investment wrapper. They’re a staple for portfolios of all sorts. For good reason. These wrappers are versatile, transparent and relatively simple. They’re big business, too. At the close of 2023, the South African unit trust industry was worth some R3.5tn. For comparison, at that same date, the JSE exchange traded fund (ETF) industry was worth R160bn.
However, in a fast-changing investment landscape, what does the future hold for unit trusts in South Africa? There is sound evidence that these robust products have plenty of runway. Likewise, they face hurdles that the investment community needs to address.
Good news for unit trusts
First, the good news. There are three primary reasons that unit trusts are set to retain their long-earned dominance as a favourite with retail investors. The most fundamental lies in the market structure itself. Retail savings are heavily intermediated, with most assets sitting on Linked Investment Service Provider (LISP) platforms. And, at present, LISP platforms only cater for unit trusts. Add to this the fact that LISP investments are large and growing, and all of this amounts to a strong tailwind for unit trusts.
Next, unit trusts benefit from sheer breadth of product. As a long-standing, trusted product in South Africa, unit trusts grant investors access to an unparalleled variety of asset types and markets, both local and global. Today there are approximately 1 800 unit trust funds available in South Africa.
Finally, South Africa has a large proportion of compulsive savings. This is good for unit trusts, as the wrapper of choice in this space. This is evidenced by a large multi-asset category.
Staying on top
None of that means the future is guaranteed. Money managers, the industry, and the economy itself face important challenges to overcome in order to ensure unit trusts continue to thrive.
For starters, the trend of capital leaving South Africa’s shores is an immediate concern. Many of the drivers behind this move are political and macroeconomic. No silver bullet exists to fix this. The financial services industry can – and should – do its part to contribute to the revival of more prosperous times for the economy.
The relaxation of Regulation 28 by the National Treasury in July 2022 has contributed, too. Finance Minister Godongwana’s change allows for pension funds and other asset managers to increase their offshore holdings.
As always, there is the threat of competition. This is a dynamic industry, with plenty of incentive for innovation and product development. The chief threat to unit trusts at present is active ETFs. These are beginning to establish themselves and have plenty of potential.
However, active ETFs will likely take time to gain traction. The American market made its first genuine strides with products like this in the early 2010s, but they only really became mainstream in the last two years. They have a long way to go if they are to catch up with unit trusts in South Africa.
