I don't often write about company specific products, but one came at me recently which impressed me. Over the past year I have written a number of columns about how the financial services industry has increasingly made investing more expensive and complex by adding additional layers to the process.
One of my main targets has been the linked investment product business, which is simply another layer, although it does give investors far greater investment choice.
The question is, how many in-vestors require this wide choice of products being offered by an equally wide range of companies? My view is that very few do, particularly as the choice has often been unwisely used.
Many investors have simply used the option to chase the latest top-performing investment opportunity, buying at the top - because most of us only identify the latest top performer at, or near, the top - and then switching to the next top performer when the previous choice falls out of favour.
Wisely used, the choice should be part of a diversified investment package where timing the investment, and not timing the market, should be the over riding strategy.
However, most of us have neither the nous nor the time to go seeking out the correct combination offered by all the investment product companies in the country, let alone abroad.
My view has always been that you should pick out a reputable company and then limit your choice to a product offering underlying investments which suit your risk profile.
By underlying investments I do not mean investments offered by other companies, as happens with a linked investment product company, or some of the new generation life assurance policies, which are structured in much the same way as linked investment product companies, or multi-manager products.
What I mean by underlying investments are the shares and the bond structure of a single product, managed by a single company.
So say you are looking for capital growth, you would invest in a single general equity unit trust, which has a well structured portfolio of both South African and foreign shares.
If you are looking for a more conservative investment, you would choose a balanced or smoothed life assurance bonus portfolio, or asset allocation unit trust funds which invest more conservatively in bonds, shares and cash.
The result is that you remove a layer of costs and commissions.
Again, my view is that once you have decided on the type of generic - single layered - investment product you require, you should then choose a single company, taking into account the company's reputation and its long-term track record in providing returns that are sound - not stellar one year and dog the next.
Often the investments you make come in a legal wrapper, particularly with retirement saving investments. Retirement saving investments have been a particular target of these multi-layered investment structures and include retirement annuities, preservation funds and living annuities.
While having lunch with the top dogs at Alan Gray recently I was told about a new product range they have originated, which fits in with my phil- osophy of investing.
They have developed a range of retirement products - retirement annuities, preservation funds and living annuities - in which you have some say in the underlying investments, but a costly layer has been removed.
Once you have decided on the retirement vehicle you need, you then have four unit trust fund investment choices, which you can mix and match according to your risk profile. These are:
- An equity fund, which is for the higher-risk investor with a five-year investment horizon and a focus on capital growth rather than income;
- A balanced fund, for investors with a lower risk profile, such as those close to retirement, who want to leave both the asset allocation - the proportion of property, cash, bonds and shares - to Allan Gray;
- A stable fund, which consists of underlying investments in bonds, cash, money market instruments and shares, with the aim of providing high income with a low probability of negative performance. This fund is aimed at those who are highly averse to risk, probably nearing retirement and wanting to protect their savings. It also suits people already on retirement - living annuities - who want to draw an income; and
- A money market fund which is suitable for people who want a short term haven for funds during times of market volatility, who are risk averse and/or have a short-term investment horizon.
Now comes the really good news:
- There are no initial fees, apart from compulsory charges of 0.65 percent to pay taxes and stockbroking fees;
- There are no early withdrawal penalties;
- The annual fees are an administration charge of 0.4 percent and the normal Allan Gray unit trust annual fees, which are based on performance - apart from the money market fund, which has fixed annual fee of 0.5 percent of assets. These fees range from 0.5 to 1.5 percent on the stable and balanced fund, and from zero to three percent on the equity fund.
Fees paid to financial advisers are negotiable within set maximums. The maximums are an initial fee of three percent of your investment and 0.5 percent a year for on-going advice; or an initial fee of 1.5 percent and one percent a year.
Allan Gray is not the only company that has this type of simple and cheaper structure available. The big difference is that Allan Gray is actively marketing this cheaper and simpler option, rather than the more expensive and riskier layer products, from which more money can be made by the product provider on down.
This is the type of product range that is in the best interests of investors, and not only the interests of the higher cost products that many in the financial services industry often prefer to sell you.