Thu | May 25, 2017

Advisory Column: Unit trusts, a better option

Published:Sunday | March 1, 2015 | 3:00 AM

As commercial bank deposit rates for relatively small sums struggle to beat one per cent per annum, money market unit trusts are presenting themselves as a better option.

The above table illustrates the 12-month growth rate, calculated on a percentage basis on the difference between the prices now and the corresponding time last February. This exercise is not meant to determine which of the funds is better managed as there are several reasons why there are differences in the rates of return.

Additionally, it should be noted that these returns apply specifically to the period under consideration and would not apply to units held for less than one year, whether by virtue of units being bought after the specified date in February 2014 or sold before the specified date in February 2015.

The ideal situation would be to limit this discussion to funds that invest only in Jamaican securities, but I have included the Scotia funds, which, in addition to investing in local debt securities, including commercial paper and certificates of deposit, also invest in commercial paper and certificates of deposit issued by selected overseas entities.

Indeed, considering the variations between the investment philosophies of the different funds, we do not have a basis for commenting fairly on the management of the funds. Suffice it to say that these are money market funds so investors can, at least, see the various options in the market place.

One issue that arises when we examine these returns is risk. Government instruments are generally considered to be safer, or less risky, than instruments issued by corporations. As such, the yields on the latter would be expected to be higher to compensate for the higher risk.

Liquidity is a major advantage of investing in all of the funds listed as the units can be converted to cash quite easily for, unlike certificates of deposit, the investment is not for a fixed term. Another is security of principal. Additionally, returns are not a function of the size of the investment.

A disadvantage of this type of investment is that the funds do not make cash distributions, except in the case of Scotia's Premium Money Market Fund, which makes a quarterly distribution and gives unit holders the option of automatically reinvesting the distribution in new units. Barita's Income Portfolio also provides for income distribution but is not included here because it is less than one year old.

There are other unit trust funds that registered even higher returns than those mentioned in this column but they do not qualify as money market funds because they invest in securities that have longer maturities.

Nevertheless, they should not be discounted when decisions are being made to invest in unit trusts. The longer maturities of the instruments in which they invest tend to raise their returns, but their units are not less liquid than units in the money market fund.

Some funds have also been able to generate better returns than those discussed here because they include securities denominated in currencies other than the Jamaican dollar.

Before deciding in which fund to invest, consideration should be given to whether there is a minimum period for which the units should be held before they can be sold without incurring a charge and the minimum which can be invested.

Given the realities of our economy, it makes sense to diversify even unit trust portfolios by currency, type of security and the maturity profile of the securities in which they invest.

n Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel.