Page 45 - Profiles's Unit Trusts & Collective Investments - September 2024

Basic Concepts

Time is the Best Protection
Fund managers are obliged to stick to a number of rules and regulations to ensure that
investors’ money is not exposed to inordinate risk. But management companies cannot
guarantee performance in the share market – investments that fund managers – like all
investors - make into a market like the JSE are subject to the ups and downs of that market. Equity unit
trust investment involves a level of investment risk, which reduces the longer the investment is held.

percentage of the investment amount, the initial charge
is deducted before the remaining balance is applied to Interest
the purchase. To give a simplified example, if an Although the man-in-the-street might
investor wishes to invest R10 000 and the initial charge think of interest as something you
is 5% (including VAT), the investment statement will earn on an investment, interest is
reflect R9 500 applied to the purchase of units at the really the cost of borrowing money (ie, the
NAV price, and R500 recovered by the management payment made in return for the use of someone
company by way of initial charges. (The statement will else’s money). From the lender’s viewpoint,
also, of course, show the number of units bought for interest can be regarded as the compensation for
R9 500, which will typically include fractions of units.) deferring consumption to a future period. Interest
is expressed as a rate per period of time, usually
Annual service fees (which might also be called
annual management fees or investment management one year, in which case it is called an annual rate
of interest. Interest may also be regarded as the
fees) are the fees charged by the management cost of money to a bank, since that is what the
company on an ongoing basis for portfolio bank must pay for attracting depositors. The
management and administration. Excluding a few amount of interest paid per 100 units of currency
outliers, annual fees typically range from 0.5% to is known as the interest rate.
1.75% per annum of the portfolio value (the average is
just under 0.9%). Although expressed as a per annum
percentage, this fee is usually recovered monthly or NAV Price
even daily. To give a simplified example, a fund with a
portfolio of R1bn and annual fees of 1.2% p.a. will The net asset value price of a unit or
recover R1m per month from the portfolio. participatory interest is the total net
asset value (NAV) of the portfolio divided by the
Other costs and charges may be applied by a fund number of units in issue. The NAV per unit is net of
manager in addition to initial fees and annual (after the deduction of) annual management fees.
management fees. These are covered in other NAV to NAV performance figures (sometimes
chapters – see portfolio charges, performance fees, denoted as NAV-NAV) indicate that no
total expense ratios, trailer fees and switching costs deductions have been made for initial fees or
in the index for more details. adviser fees in calculating the returns.
Return on Investment
The return to the investor from his or her investment in the unit trust comes from two
elements: capital growth and income. Certain kinds of assets, such as shares and property, are
subject to changes in market value, leading to capital gains and capital losses.
Other assets, like cash, only earn income. If you deposit R1 000 in a savings account, the
“capital” (the R1 000) is fixed, and you earn interest. But if you buy a flat and rent it out, you earn
income (rental), and at the same time the value of the property may rise (a capital gain).
When it comes to unit trusts, capital growth refers to an increase in the price of units which
occurs as the values of underlying investments rise. (Of course, these can also go down, which
could lead to capital losses.)
The income from unit trusts comes from two main sources: dividends and interest. Dividends
are paid by shares, and interest is earned on the cash held in the portfolio. (Although some fund
managers aim to be fully invested, the daily creation and redemption of units within a unit trust
means the fund must always have some cash on hand.)

Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts 43