In one of my articles I mentioned an investment vehicle known as Unit Trusts.  I would like to take a little time to discuss them as despite their usefulness they still remain one of the minor investment choices. 

There are principally two major types with the first being a money market unit Trust in which at least 50% of the investments must be in fixed interest instruments.  The second type is one in which less than 50% of the investments are in fixed interest instruments.  Thus the funds could be invested in real estate, in shares, in other assets or a combination of these.

The money market unit trust works on the concept that by pooling all the funds together a better rate of interest can be obtained by all.  This means that the person who puts five thousand dollars into the fund gets the same return as the person who puts a million dollars.  A fee is deducted from the fund each month and the total income is divided amongst all unit holders.  This is the only type of investment where all persons earn the same return which for small investors is usually higher than what they can obtain from other institutions.  There is one difference though, the investor is not paid interest, and instead what happens is that the unit price increases.  For example if you buy units at a price of $6 and it earns 11% then the price increases to $6.66.  This unit trust offers an added advantage for the long term saver as amounts up to $1 million if invested for five years can be encashed with no tax to be paid.
The second type of unit trust is tax free regardless of the amount or the time period, however these are riskier in that a significant portion of the funds may be in shares or property.  Because they are more risky, it is expected that a higher rate of return could be earned on these funds.  However when times are bad the returns on these funds can become negative and can reduce your original principal.  Effective management is needed for these funds in order to deal with a dynamic environment.
Unit trust are very similar to mutual funds but with one main difference.  The assets that support the investments of the unit holders are not held by the management company but are held in trust by a third party.  This means that if the management company were to go bankrupt the unit holders would not lose their investment.  There are four companies that offer these services (see Fridays Financial Gleaner), talk to one of them to get more information to see if it is for you.

Feedback question:  Have you ever purchased Unit Trusts and  how was the experience?

After being in operation for about six weeks, I thought it would be appropriate to take a little time to thank you for all your comments and questions.  Although I will not be able to answer all questions raised it is hoped that the information that you gain from this blog will help you to make better investment decisions.  I must emphasise that the purpose for this blog is not to give financial advice but to encourage healthy discussion on a wide range of issue that perhaps you never thought of as investments.
One of the points to remember about investing is that advice that is given generally by any person is not applicable to all persons.  By this I mean that if a person recommends a particular investment, that investment may not be suitable for everybody   It has become a common practice in the market place for ‘experts’ to give investment advice and for all the people to rush out and act on the advice.  However I must caution you, that one of the fundamental rules of giving advice is that you must understand the investment profile of the person.
The investment profile of a person consists of three main factors.  First, how much risk is the person prepared to take?  This is dependent entirely upon the person as different people are comfortable with different amounts of risk.  This does not excuse the investment advisor as it is prudent to steer clients away from taking too much risk.  It can be true that sometimes people think they can live with the risk when they cannot.  One only needs to think about Cash Plus and Olint to prove the point.
Secondly, when investing, one must consider the time frame of the investment.  If one wishes to invest for three months only then the options for that person are very limited.  If they have a longer time frame in store then more options arise including possible tax free options.  The third factor is the age of the person.  Although not always true, a good general rule is that the older an investor is, the lower should be the level of risk.  This is because if a younger person loses money from a risky investment decision then they have time in which to recover.  Someone who is older or retired for example may not have that option.
I must stress that everyone is different and so what is good for one person may not be good for another.  Take some time to think about your own profile and write it down.  The next time that someone approaches you with an idea, see if it matches your investment profile.

Feedback Question: Do you think that understanding your profile will help you to make better decisions or is it unnecessary?

Today the craziness continues on Wall Street, after dropping by 18% last week stock prices rebounded by 11.1%.  For the expert investor the situation is totally frustrating but the average investor is totally confused.  What should one do? Where should one put their money?  Before answering those questions it is important to ask a more important one, namely, “how did we get into this situation?”  I have heard many analysts debate this problem but only one hit the nail on the head.  The reason that he gave was the same reason that led to the collapse of Olint and Cash Plus – Greed.

That is not to say that people were not tricked into believing that the assets that they were buying had value but it is the greed of the Banks and Brokers coupled with that of the investors that led to most of the problems.  The banks sold the assets (mainly mortgages) to other banks and these assets were highly rated by the bond insurers.  However the bond insurers are paid by the banks and brokers who sell these instruments.  Therefore if you want to make money you ensure that you rate the assets highly.

Gone are the days when the interest of the customer is considered.  Sadly the same situation is beginning to occur in Jamaica, companies (banks and brokers) sell products to customers that they themselves do not think are good but which will generate income for the company.  These schemes only work for as long as the customers have confidence in them; once confidence has gone the scheme comes crashing down. When these investments fail, and they will, they then try to cover themselves by saying that the contract set out all of the risks.

To further understand the conflict for the “wealth advisors” consider the case of a person who buys a mutual fund.  When stock prices are falling the correct thing to do from the perspective of the customer would be to sell the units in the fund.  However if the customer encashes their units then the company will not receive the commission for retaining the business.

Feedback question: Do Wealth Advisors in Jamaica give you good advice?

The recent announcement of the purchase of Blue Cross by Sagicor Life Jamaica Limited seems to have bypassed all of the financial experts out there. I expected there to be some concern about the deal but so far everyone including the Financial Services Commission (FSC) is keeping quiet. Here is the problem as I see it.

The purchase of Blue Cross by Sagicor will give them an estimated 95% of the total health care market with the only other major provider being Medecus which is a relatively new company. This will result in Sagicor essentially being able to operate as a monopoly. Some may see this as a good thing and promote that the new company will operate more efficiently due to economies of scale. This concept is that a single larger entity should operate more cost effectively than two separate entities. There is truth in this concept because less staff is required, only one administrative and computer system is required and only one Head Office.

However, lower costs are not the reality in most cases. Companies who dominate the market often charge higher prices because there is no one to compete with them. They pass on these higher fees to customers who have no other options. Ask the civil servants about this, originally both Blue Cross and Sagicor competed for the business, with the proposed acquisition the two have effectively become one. This cannot be a good way to resolve what has been such a contentious issue. One only has to remember what the telecommunications market was like before Digicel.

The FSC is supposed to regulate the industry in order to protect the consumer. First we had alternative investments now we have a potentially dominant health service provider. If the FSC does not have the power to address these issues then it needs to be given that power. If it has the power then it should exercise it.

Feedback Question: Is the Financial Services Commission really looking out for the interest of the cucstomers?

The recent collapse of the alternative investment scheme Cash Plus and now Olint, with losses estimated as high as $200 billion, has a lot of people asking the question: What has happened? Some persons believe that it was the formal financial sector which brought down the schemes. They say that the sector was concerned about losing funds to the informal sector and conspired to bring about it’s downfall by pressuring the financial services sector to close down the companies.

Others believe that the companies were nothing more than pyramid schemes. A pyramid scheme operates on the basis that money is paid out of new proceeds being received and not on any earnings that are generated. This scheme obviously will depend on people continuing to bring in new money which will only happen as long as there is confidence in the scheme. Of course given that no income is being generated, it will inevitably fail.

While I applaud the efforts of the companies to spread the wealth around, they failed to use some basic investment strategy. In the case of Cash Plus they forgot that you do not use short term money to invest in long term assets such as businesses and property. Secondly, both companies breached the rule that if you are taking money from persons you must be able to account for it by refusing to present financial statements. One of the main aims of this blog is to inform readers about basic investment strategies and to promote discussion on current happenings.

Feedback question: Are Carlos Hill and David Smith heroes or villains?

With the Olympics just finishing in Beijing, China I thought it would be a good time to look at this business called sports. Mark my words it is a business it is no longer just a game. The Chinese government has spent US$80 billion on hosting this event. At a time when there are hundreds of thousands of Chinese who are homeless after the earthquake: is this how money should be spent?

This brings me to Jamaica where large sums were spent on hosting the Cricket world cup. The Jamaica Football federation needs three billion dollars to fund the programme to the South Africa world cup. The reality is that these sports have become so professional that for small countries to compete large sums of money have to be spent on playing sports. But for small countries like Jamaica, is this the best investment for their money?

We often don’t see this as an investment but it is a choice about how scarce resources should be used. I am not advocating that no money should be spent on sports I am only wondering whether too much is being spent. An investment in sports helps a few select persons to excel with a promise of a potentially large return. There is no doubt that professional sportsmen earn large salaries. There is also no doubt that many persons get a sense of pride when our athletes do well in competitions.

However, we ought to consider whether more of these resources ought to be invested in education. Education gives a large number of persons the opportunity to earn a salary that will support them and their families. Education can help almost everyone to succeed whereas sport will only benefit a few talented persons.

Feedback question: Is too much emphasis being placed on sports and not enough on education?