Deciphering the price of a unit trust

By: Ray Mhere, Allan Gray

The price of a product tells you a lot about what you are buying. So what does the price of a unit trust tell you? Allan Gray’s Ray Mhere explains how a unit trust is priced and what it means for you as an investor.

Many of us are familiar with unit trusts as an easy and affordable way to access financial markets. Your money is combined with the money of other investors who have similar investment goals. “Investment managers use the pool of money to buy underlying investments to build a portfolio, which is then split into equal portions called units,” asserts Ray Mhere, regional manager at Allan Gray. The number of units investors get depends on the amount of money they invest and the price of the units on the day they buy.

How a unit is priced

The maths behind unit trust pricing is simple: first work out the assets under management and then minus operating expenses before dividing this figure by the number of units. “The assets of the unit trust are the shares, bonds, cash and property that the unit trust owns on behalf of investors,” explains Mhere.

Operating expenses, on the other hand, comprise fund management fees, trustee and custodian fees, audit fees, bank charges, transactional costs and VAT. “Once operating expenses are subtracted from assets, this figure is then divided by the total number of units bought by investors,” he says.

But trouble arises when you start comparing unit trust prices, while ignoring the value of the underlying assets. “If we have two unit trusts both with assets of R1 000, but one has 50 units and the other five, their prices would be R20 and R200 respectively,” remarks Mhere. “An investor would be mistaken in thinking that one is 10 times more valuable than the other by virtue of its price.”

Unit trusts are priced differently to shares

There is a vast difference between the price of unit trusts and shares. “The share price of a stock is agreed to by buyers and sellers at a given time and often is a wild guestimate based on sentiment, mood and herd behaviour,” comments Mhere.

By contrast, the price of a unit trust comes from the actual value of the investments within it, with sentiment playing no direct role. “If investors fall in love with a stock and buy it in excess, the price of that stock will be driven up,” he says, “but if investors love a unit trust and buy it, it won’t influence the unit price.”

How should you compare unit trusts?

According to Mhere, instead of just looking at price, the correct way to assess a unit trust is to see how the price per unit has grown over time, usually shown on a fund’s factsheet as a percentage return over different periods. “This will give you an indication of the track record that the investment manager has for creating wealth,” he explains.

The second thing investors need to do is examine the unit trust’s operating expenses (shown as a total investment charge on factsheet) to make sure these are not excessive.

“In addition to performance and costs, think about what you need from your investment and the risk you are comfortable with. Find an investment manager whose style and philosophy resonate with you; alternatively, speak to an independent financial adviser to help you make the right decision for you.”