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Fri, 04 Jun 2010 - 16:20

A Brief Look at Investment Products

Saving for retirement can be a daunting task. Nevertheless it needs to tackled head on to ensure that you can retire with the same, or a similar, living standard that you had when you were still working.

There are a wide range of assets that one is able to invest into which are generally the primary drivers of the return you receive. Today, however, we'll take a look at some of the investment products that are out there. While the product won't drive returns, they can enhance or detract from returns. Ensuring that you invest in credible product is essential to reduce the probability of fraud occurring in your investment vehicle.

We will take a brief look at unit trusts, hedge fund investments, and private equity (via an endowment).

A unit trust is a relatively easy simple investment to understand. All investors' money is pooled together, and managed by the manager. Each investor is issued with units from the pool, and these units are priced daily with investors being able to draw funds daily (although it might take a couple days to land in your bank account). Costs are relatively low, and there is a lot of flexibility in a unit trust structure. The large portion of investors' money is typically invested into unit trusts for these reasons. Stock market gains are taxed at CGT rates only on realisation.

Hedge funds come in a host of forms; some are relatively straight forward, while others have complex mandates. A simple long/short fund will look to go long (buy) shares/derivatives where the manager perceives value, and short (sell) derivatives where the security is overvalued. Different funds will have different mandates, which will determine how much gearing the manager can use, and other important risk constraints. Hedge funds often come in the form of Limited Liability Partnerships. Hedge funds are often only priced once a month, and sometimes have a lock in period. There's still some debate as to whether gains should be taxed at CGT or Income tax rates, there is also uncertainty as to whether these gains should be taxed as and when they occur in the fund, or only on redemption from the fund.

Private equity is typically accessed through an endowment structure, where your investment is locked up for at least 5 years (subject to certain withdrawal provisions); the manager then uses your money to invest into private equity funds. As these funds aren't publicly traded, they are priced infrequently (typically once a quarter), and withdrawals prior to the fund maturing can be penalised. Endowments are taxed within the structure, and a favourable tax rate is used, so the value that you receive at maturity is tax free. Hedge funds can also be accessed through an endowment.

Investment complexity creates opportunities, but also increases risks. You need to be sure that the potential opportunities outweigh the potential risks that exist before investing. If you can accurately ascertain the risk levels, and you believe that the risk/return payoff is justified, then it may well be worth looking at investments that are generally marketed for sophisticated investors. Be aware, however, that 'sophisticated investors' don't always get it right, just ask some of the investors into Bernie Madoff's funds.

Having a thorough understanding of your needs will help you make the correct call when it comes to deciding on what asset class and what structure you should invest in.

Take care,

Mike Browne info@seedinvestments.co.za www.seedinvestments.co.za 021 9144 966

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