Investing directly in shares or via a unit trust

We have talked about the difference between investing directly in shares versus investing via a unit trust fund before, but there is still a lot of confusion out there. So let us summarize the differences between the two as follows:

Direct share investment

This type of investment is ideal for traders who want to buy and sell shares on a regular basis; or investors who have a specific interest in a particular company and want to hold the shares for the longer term. There is a third group of investors, who use a direct share portfolio to increase the possibility of higher returns on their overall equity investments by investing in smaller, higher-risk companies. This naturally also increases the risk of getting it wrong and losing money.

Unit trust investments

This type of investment is ideal for people who do not want to be actively buying and selling shares.

Using your own stockbroker vs unit trusts

There are thousands of companies to invest in worldwide; some of these companies will thrive over time and some will go bust. When you decide to buy and sell shares directly, you have to do a lot of research to understand the company you want to invest in and then continuously monitor that company to know when you have to sell again. Some people might argue that they would ask a stockbroking company to make these decisions for them but that would mean they are simply creating their own unit trust fund. Asking an investment professional to buy and sell shares on your behalf is exactly what you do when you invest in a unit trust fund.

We have also noticed that very few stockbroking companies actively buy and sell shares in the discretionary portfolios they manage for clients. They adhere to a buy-and-hold philosophy and only buy when there is a new cash inflow. Unit trust managers are much more focused on actively managing the collective funds under their care and have to make daily decisions on which new shares to buy and which to sell because there is a constant inflow of new cash and outflow of old cash. We have also found that the amount of expertise in the fund management houses exceeds those of the general stockbroker and depending on the size of your direct equity portfolio you might get a stockbroker who lacks the proper experience.

Cost is another issue people raise when comparing the two. It has to be understood that if you ask a stockbroker to manage a direct portfolio for you, he will charge you a fee which is often not much less than the fees charged for investing in an equity unit trust fund. At JWR we do offer a service managing direct share portfolios for clients but we make it clear that we do not actively trade these portfolios, but rather engage with the client who has an interest in owning direct shares. Because we have regular interaction with the fund managers of the unit trusts we invest in, we tend to buy or sell shares on their recommendation.

In conclusion

At JWR we prefer to manage our clients’ portfolios by investing in unit trusts. We feel comfortable with their expertise and their dedication to managing the funds for the benefit of their investors and we encourage clients to have direct share portfolios only if they fall into one of the categories described at the beginning of this letter.

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