Wrap funds (also referred to as model portfolios) may form the core of your investment portfolio, and you may be wondering how they work and the benefits they offer. Read on, as we have listed some facts and benefits that will help you understand them better.
What is a wrap fund?
The term wrap fund is a bit of a misnomer, as it’s not actually a fund. A wrap fund consists of a combination of collective investment schemes (also known as unit trusts) held in specified proportions to achieve a specific investment goal. This portfolio is managed (or ‘wrapped’) according to a specific mandate, and which aligns with your risk profile as an investor.
|An investor’s risk profile provides an understanding of the level of risk the investor is willing to take on or accept. It is shaped by his or her sense of balance between risk and return. Some investors can tolerate greater risk to earn greater returns. Some investors want less risk and are content with a reasonable return.A conservative investor requires stable investment growth or a high level of income. The primary investment goal is capital protection.A moderate investor invests for the longer term and requires no income. The investor can tolerate fluctuations in the value of his or her investment from time to time.An aggressive investor invests for the long term and seeks the highest possible growth. Typically, the investor is prepared to accept substantial fluctuations in the value of his or her investment. The primary investment goal is long-term capital growth.
What are the benefits of being in a wrap fund?
You may wonder why your financial intermediary recommends a wrap fund. Here are a few pro’s:
Skilled professionals manage the wrap funds
Only investment managers (including financial advisers) approved by the FSCA (Financial Sector Conduct Authority) may manage wrap funds. You can therefore rely on experienced investment professionals to select the funds within your portfolio from a collection of thoroughly researched funds, to create a solution that aim to deliver on your specific risk profile’s required returns. These professionals manage the wrap funds in a rigorous and disciplined manner on investors’ behalf, in accordance with their investment mandates and benchmarks.
This is especially convenient and comforting for investors who do not have the expertise to select the most suitable funds, nor the time to regularly review their investments.
These professionals actively manage the wrap funds in accordance with clearly articulated and documented goals. They continuously monitor the wrap fund, perform switches between underlying collective investment funds and rebalance the composition of the wrap fund to perform according to the specific mandate, which is chosen to be consistent with a specific risk profile. They ensure the wrap funds remain in alignment with mandated requirements.
Time is spent trying to find the most efficient portfolio at the level of risk you are willing to accept
Meticulous fund manager and macro-economic research is used to construct an optimal investment portfolio for every risk profile, blending collective investment funds to avoid correlated returns. The aim is to get as close as possible to the optimal portfolio with regard to the best returns for the level of risk incurred.
Wrap funds have pre-defined benchmarks and objectives, and because investors have direct ownership of units in the underlying investment funds, all the collective investment funds in which the wrap fund is invested, are indicated on the investor’s statement.
Value for money
Investors seem to get far more value in a wrap fund than a standard investment portfolio. For an average additional administration fee of 0.25%, investors are assured of a regulated, actively managed, thoroughly researched investment, the management of which is based on the optimal level of risk they’re willing to accept to achieve their required objectives.
One of the greatest benefits of a wrap fund is that it provides the convenience of a ready-made solution for investors who do not have the time or expertise to select the most suitable portfolio of collective investment funds, and to regularly review their investments. A wrap fund is actively managed and continuously reviewed, taking into account the risk profile for which it was designed, thereby providing peace of mind for the investor.
Being a Glacier client means that you and our adviser have online access to your portfolio at www.glacier.co.za, where a holistic view of your investment portfolio is just a few clicks away. Talk to your financial adviser, or us, if there are any details that you don’t understand. We’re here to help demystify investments so you can have a hold on your financial future.