Personal Finance

Chapter 8:
Unit Trust

Welcome!!
 Definitions

• Mutual funds – this is the ‘American’

version of the Unit Trust.
• Unit Trusts: South Africa’s version of a
mutual fund also referred to as Collective
Investment Schemes (CIS).
• CIS: Collective Investment Schemes,
referred to as Unit Trusts.
• CIS managers: Fund managers/asset
managers that make the investment
decisions for a particular portfolio.
 Definitions

• Retail investments: Individual investors.

People like you and me.
• Institutional investments: Investments
made by institutions/corporate entities (e.g.
pension funds, banks, etc.).
• Regulation 28: This regulation limits the
exposure to certain asset classes that can be
used for retirement funds, to ensure those
fund managers to do not expose retirement
money to unnecessary risks.
 What is a Collective Investment
Scheme (CIS)/Unit Trust?

• A CIS is an investment vehicle used to combine investors’ money

• A professional investment manager is appointed to manage the
funds on the client’s behalf, according to a specific pre-defined
set of rules called the mandate.
• The mandate stipulates what type of assets can/should be
invested
• The pool of funds is held in a trust structure and is overseen by
appointed trustees.
• The total pool of money is divided into identical pieces called
‘units’ or ‘participatory interest’ and you share the risk and the
benefits of the fund in proportion to the number of units you own.
• The growth depends on the assets that are lying in the pool of
funds and how they perform.
 CIS defined (CISCA no.
45 of 2002)
• “two or more investors contribute
money or other assets to and hold a
participatory interest in a portfolio of
the scheme through shares, units or any
other form of participatory interest; and
• the investors share the risk and the
benefit of investment in proportion to
their participatory interest in a
portfolio of a scheme or on any other
basis” determined by the deed.
 Industry role players

• The Manager: the entity that initiates &

registers the CIS & creates a trust deed.
E.g. Allan Gray.
• Trustee(s) for CIS’s that are registered
as a trust or Custodian(s) Trustee’s
CIS’s that are registered as another type
of legal entity. E.g. bank, insurance
company or a public company,
• Fund Manager: decision-maker &
determine how the funds are invested. (an
individual / a team)
 Industry role players

• Association for Savings and Investments SA

(ASISA) was formed in 2008: represents most
the country's asset managers. Previously known
as AUT (Association of Unit Trusts)
• Financial Services conduct authority (FSCA)
took responsibility for disclosure requirements
& CIS’s need to register to operate legally.
• Linked Investment service providers
(LISP’s); the admin hub for all the different
funds
• Brokers/Financial intermediaries/advisers:
Structure of CIS
 Trust deed & Fund
mandate
• Trust deed: sets out the rules and parameters for
the fund and the way it is to be operated,
philosophy, investment conditions, fees, and how
will it buy back units from investors.
• Fund mandate = needs to be set by the
Management company = ‘roadmap’ for the fund
manager. Includes: fund objective, type of fund -
retail or institutional., what the fund will be
measured against (called the funds' Benchmark),
funds allowed investible universe – what asset
classes can be invested into, any investment limits
and constraints, & details of the asset manager
 Benefits of CIS’s

• Economy of scale = ‘strength in numbers’

• Units are owned by the client = in your own
name
• Choice = mix, risk profiles to investment
philosophies.
• Safety of funds due to high level of regulation:
Financial Advisory and Intermediary Services Act
2002
• Affordability and payment options: R200
debit order, and R1000 once-off investments
 Benefits of CIS’s
• Easy access to invest
• From the Management company directly
• Through a Linked Investment Service Provider (a platform)
• Through an adviser/broker
• Flexibility: money is accessible without penalties
• Access to of professional investment knowledge
• Liquidity: Guaranteed buy-back of participatory
interest = open-ended investment
• Diversification benefits: spreads risks
• They can be measured/benchmarked
 Benefits of CIS’s
• Transparency & Costs are disclosed:
• Net Asset Value (NAV) = Market value of assets – portfolio
liabilities
Number of units in issue
Assume the Unit Trust has R100 000 000 in portfolio assets,
R 3 000 000 in liabilities, and 10.750 million units outstanding.
NAV = R 100 000 000 – R 3 000 000 / R10 750 000 = R
9.0233 per share/unit
• To calculate the units:
If you invest R1 000 in a fund with a NAV of R118.74,
Participatory units bought: R1 000/R118.74 = 8.42 units
 Benefits of CIS’s

• Price & performance data freely

available: companies are legally
obliged to announce details of
underlying investments & performance
statistics to the public (quarterly), which
is not the case for pension funds or the
life insurance industry.
• Tax efficiency - no Capital Gains Tax
(CGT) inside a CIS
• CIS’ classification
 CIS’ classification

• 1st Tier: Geographic focus – it answers the

where are they invested (Domestic, Foreign,
Worldwide)
• 2nd Tier: Type of underlying asset/asset
allocation – it answers what are they invested
in (Equity, Asset allocation, Fixed interest)
• 3rd Tier: Investment style/category/asset focus
- it answers how are they invested (Financial,
Financial & Industrial, General, Growth, Large
Cap, etc.)
 Regulation of CIS’s
• The Collective Investment Schemes Control Act
(CISCA):
• Keeps pace with international best practice
• Determine the instruments that may be included in a portfolio
• Association for Savings & Investment South Africa
(ASISA):
• Create equal opportunities for its members
• Looks after the interests of consumers
• Ensure sustainability of the industries
• Financial Intelligence Centre Act (FICA) – Know
Your Client (KYC)
• Identification & Proof of residential address
 How do CIS make
money?
• Income – either through interest income,
property income or dividend distributions
• Capital gain - an increase in the unit price
while the reinvestment of distributions
means more units in the investors' account.
Return Income Capital gain
type
Asset Interest Income Dividend Income Property Capital gain
Class Income possibilities
Equity No Yes No Yes
Property No No Yes Yes
Bonds Yes No No Yes
Cash Yes No No No
 How are CIS taxed?

• Interest income
• On all income you earn, including investment income
(interest, foreign dividends)
• Dividend income
• when the company declare profits & pay dividends, you will
be entitled to a portion. This profit will be taxed as
dividends, known as Dividend withholding tax (DWT). 20%
of your dividends will be held back by the fund manager
and be paid over to SARS directly
• Capital gains tax (CGT)
• You only incur CGT once they sell your units in a Unit Trust.
 Different types of CIS

(1) Feeder funds, (2) Fund of funds/Multi-

Manager funds, and (3) Passive funds
with different tax rules.
Types of different products can include
endowments, living annuities, retirement
annuities, pension/provident preservation
fund, Unit Trusts/platform investments.
 What are the fees?

Administration fees
Investment Management fees
Advice fees
Other fees including
(sometimes) penalties, loadings, or
exit fees.