Page 156 - Profiles's Unit Trusts & Collective Investments - September 2024

CHAPTER 8

GIVI, SWIX and DIVI
The Global Intrinsic Value Indices are produced by US-based S&P Dow Jones. The
GIVIs, like the Rafi and eRafi (see Smart Indices section), use criteria other than market cap
to determine index constituents and weighting. The GIVIs, however, define ‘value’ very differently to
Rafi. The GIVI indices select shares on the basis of volatility (only the least volatile shares are
included), liquidity (shares with a turnover below a certain threshold are excluded), and book value.
The GIVI SA Top 50 index is tracked by two ETFs. This index is a subset of the GIVI SA Composite
and includes only the top 50 shares selected on the basis of volatility, liquidity and book value. The
GIVI rules also stipulate that no single constituent may ever make up more than 10% of the index.
The SWIX (shareholder weighted) indices contain the same constituents as the market-cap
indices but weight the constituents according to free float (ie, the number of shares freely available
in the local market). This reduces the weightings within the index of big dual-listed shares like British
American Tobacco and BHP Billiton.
In the name of a passive fund, ‘DIVI’ usually refers to the JSE’s Dividend Plus Index, which
contains the thirty shares with the highest forecast dividend yields. The index is weighted by
dividends, which means that the DIVI is effectively a value style index.

Feeder Funds
A feeder fund is one of several types of conduit funds that act as channels for investments into
larger funds.
The principal (or receiving fund) is sometimes called an umbrella fund or “master” fund.
This tiered structure is also sometimes used by hedge funds to create critical mass by pooling
investment capital from different sources.
Returns from the master fund, such as dividends and capital gains, are distributed to the feeder
funds on a pro-rata basis.
In the SA environment, some feeder funds have a one-to-one relationship with the master
fund. In these cases the feeder fund is created in order to have a rand-denominated investment
vehicle in South Africa while the underlying assets are held overseas and priced in their respective
base currencies.
Feeder funds for retail hedge funds were not possible until February 2024 when the FSCA
amended an its earlier Board Notice 52 of 2015 that prohibited retail hedge funds from investing
more than 75% of the fund in a single portfolio.
For South Africans, feeder funds are often the easiest and most cost-effective way to get
offshore exposure – the investor can make a local investment, denominated in rands, without
having to transfer money overseas or apply for a tax clearance. The costs associated with feeder
funds are often lower than those of offshore investments, especially where currency conversion
charges are taken into account.
One of the possible disadvantages of using a feeder fund to get offshore exposure is that capital
gains tax might be higher. This is because of the way CGT is calculated for offshore investments.
With a feeder fund, CGT is paid on the gain in rands (ie, effectively including currency gains).
With an offshore investment, however, CGT is paid on the foreign currency gain translated into
rands at the time of sale. Given the tendency of the rand to weaken against major currencies over
the long term, this can mean a substantial CGT difference. For example, an investment of
US$1,000 at R14/$ redeemed two years later with a 20% capital gain with the exchange rate
having risen to R18/$ would mean, at the maximum marginal tax rate for individuals, R1,368 in
CGT via the feeder fund, but only R648 in CGT via an offshore investment (ie, money transferred
overseas). Note that this would turn into a disadvantage if the rand strengthened over the
investment period.

154 Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts