Page 130 - Profile's Unit Trusts & Collective Investments - March 2025

CHAPTER 7

South African equity funds are obliged to invest at least 80% of their assets in shares and at
least 55% of their assets in South African equities. Equity fund managers are thus permitted a fair
degree of investment freedom.
Other noteworthy investment restrictions on equity funds include the following:
A fund may hold the greater of 10% of a share’s market capitalisation or 120% of a share’s
weighting in the fund’s benchmark – provided that the holding is no more than 20% of the
portfolio (or 35% for specialist funds). The limit is 5% for companies with market caps
below R2 billion.
If a fund’s holding in a company exceeds the above limits because the share price rises, or
because of a compulsory corporate action, the manager is not obliged to sell shares (but he
may not buy any more).
Specialist equity funds (like financial sector funds) must hold investments exclusively in
that sector.
There are limits on the extent to which funds can invest in futures, options, and other
derivative financial instruments (in broad terms, funds can hedge positions but cannot use
derivatives to gear portfolios).
A unit trust fund may invest up to 10% of its assets in unlisted companies provided these
can be valued daily using a recognised methodology.
In order to qualify for pension fund or provident fund investments, unit trust funds are
subject to further conditions. Regulation 28 of the Pension Funds Act stipulates that a
pension fund may not have more than 75% of its portfolio invested in equities. Many funds
in the Multi Asset and Interest Bearing categories are Regulation 28 compliant.
In addition, in terms of Board Notice 91 Chart 7.3
under CISCA, all management companies
General Equity Portfolio
must hold an investment of at least 13
weeks’ annual fixed expenditure for all CIS
business and seed capital of R1 million Equity investments 80%
must be invested in each portfolio until it
reaches a net asset value of R50 million for Derivatives 2%
more than six months. This seed capital
must be reinvested if the portfolio drops Cash 5%
below R50 million for a continuous period
Bonds 13%
of six months.
The possible composition of a general equity
portfolio is shown in Chart 7.3.

Costs of Equity-Based Schemes
The costs of equity-based unit trusts vary quite considerably. The majority of management
companies no longer charge initial fees.
Initial fees, where applicable, are charged on every new investment, whether lump sum,
monthly debit order, or ad hoc top-up amount. In the case of monthly debit order investment, the
initial fee is deducted from each and every monthly amount. Initial fees also apply to the
reinvestment of distributions.
Annual fees vary from fund type to fund type, as well as across management companies. Fees
range from as low as 10 basis points (0.10%) to over 4% p.a. On the whole, passive funds have
much lower annual fees while global and specialist equity funds have higher fees. For retail fund
classes in the South African–Equity categories the average annual management fee is 0.85%.
Some management companies also apply performance-based annual fees so that fees increase if
the fund manager outperforms a stipulated target (such as the fund’s benchmark). These fee
structures often have a lower and upper limit, eg, a minimum of 0.57% p.a. rising to a maximum of
1.71% for outperformance. advisers and investors should look closely at performance fee
structures to gauge their fairness, scrutinising particularly whether the performance target
(benchmark) is appropriate and whether a high watermark or rolling period is used in the fee

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