Article from Netto Invest
Can you get better returns from unit trusts?
This Fin24.com reader wanted advice about surrendering endowment policies.
Here is what he wrote:
I'm turning 60 next month, and like many others, I started to be concerned when the financial slump hit all of us a while back.
I have had four smallish policies with Liberty Life for a long time now, and 10 years ago, I expected around R550 000 at age 65. But the current predictions are around the R350 000 mark.
I have been advised by a few people to pull the money out now and see a decent fund manager who can do better with some well-placed unit trusts.
My Liberty adviser says I would be foolish to take out the surrender value of around R165 000 now, because then I would have 100% risk if I invest in unit trusts.
He added that if I just leave things alone, at age 65 I would get more or less the same value anyway as investing in the unit trust scene. He also says I would lose the disability and death benefits. But the disability cover runs out next month at age 60, and I don't need the death cover.
A friend says that I will always score more by getting out of the archaic endowment scenario, because insurance companies love to hide their financial losses inside endowment policies.
He says that unit trusts are open to daily scrutiny. I'm paying just over R1 500 per month to Liberty and this goes up by 10% per annum. My friend says that I should rather just add this amount to the unit trust portfolio and at least it won't keep going up - unless I want it to.
I must say that I am not impressed by the adviser's recommendations, but I certainly don't want to make any more mistakes that I can't recover from. What to do?
Morné Bezuidenhout gave this reply:
In fact this is not a simple question of evaluating your endowment policies vs unit trust investment. There are three separate aspects to consider -
Investment vehicle selection
Asset allocation
Asset manager selection
To get the overall picture we should address these areas individually and avoid confusion about the issues.
Investment Vehicles
What is an Investment Vehicle?
An investment vehicle is just the legal structure within which an investment is housed. An endowment policy, a unit trust, and a retirement annuity are all examples of investment vehicles.
An investor may choose to use any or all different investment vehicles
So will one investment vehicle perform better than another?
It depends on where the assets of that vehicle are invested.
Two different investment vehicles can have the same underlying investment fund.
So for example, an endowment and a unit trust can be invested in the same investment fund. In such a case the returns on each would be identical - because they are invested in the same fund.
What IS the difference between investment vehicles?
The major difference in the various investment vehicles is how they are treated from a tax point of view. And some, like endowment policies, may have a disability and life insurance element which makes the investment performance less clear.
Asset allocation
What is asset allocation?
There are various asset classes - shares, bonds, property and cash. Asset allocation means how investors apportion their money between the various asset classes. It is not determined by your investment vehicle.
Why is it important?
Investment research indicates that more than 90% of both investment returns and risk is dependent on asset allocation. So choosing the correct asset allocation is critical and it varies depending on how close you are to retirement.
What should determine it?
Your asset allocation needs to be appropriate to your time of life. If you are retiring in five years' time, you may need an asset allocation which is more balanced (i.e. less exposed to risk) than someone who has 10 years or more to retirement.
Asset Manager Selection
All investors need to decide actively which asset manager to entrusted to look after their money.
How do asset managers differ?
Asset managers have different investment approaches to investment, so choose one you are comfortable with. Most managers offer the full range of investment vehicles.
What's the best way to select an asset manager
It does not pay to select asset managers simply on the basis that they have the best performing fund for a particular year - rather select one who has performed consistently over a five or ten year period.
Your particular situation...
According to the information provided,
your money is presently invested in an endowment policy which also includes life and disability benefits.
you have no debts which is is good news because all or most of your disposable income can be channelled towards savings for retirement.
Certainly the life and disability benefits are costing you a portion of your monthly endowment premium, so you need to reassess whether those benefits are really needed especially if you feel your retirement savings are lower than you expected.
Here are 3 things to consider before you take a final decision on changing investment vehicles:
Life insurance - even where you have no debts a small portion of life cover is important in order to add liquidity to the your estate plan.
Disability cover - you ARE still working, so some cover may still be needed in case you become unable to work in future.
Taking out a new life and/or disability policy at your age is more costly than altering an existing one
If you reduce the level of cover, more of the monthly premium will be added to the investment account. Most companies allow investors to remove the annual contribution increase (in your case 10%) without imposing penalties.
As you can see from the framework detailed earlier, your decision is likely to be more about appropriate asset allocation for your life stage within ANY chosen investment vehicle rather than a simple choice of endowment vs. unit trust.
Moving out of your endowment may result in early termination charges if it has not run its full term. Such early termination charges are purely servicing costs levied by the supplier and are not an integral feature of the endowment structure.
A possible cost-effective solution may be to keep the endowment in place but switch the underlying fund to one where the asset allocation and investment manager are more appropriate. Such a switch may involve a small cost but will avoid early termination charges.
If you are unsure of what to, engage an independent, fee-based certified financial planner. He or she will be focused on your best interests and able to provide impartial advice.
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