Page 154 - Profile's Unit Trusts & Collective Investments - March 2025

CHAPTER 8

Other categories that could arise in SA in the future include volatility arbitrage, commodities,
structured finance and event-driven strategies (all of which are found overseas). An event-driven
strategy looks to exploit corporate actions like mergers, acquisitions and unbundlings.
Discretionary macro funds take bets on the direction of currencies, major market indices,
commodities and interest rates.
Other Types of Funds

Two fund types no longer have separate categories in the unit trust classification system –
funds of funds and index funds. These funds merely use different methods for achieving the same
investment mandates as their competitors.
These categories transcend the sectors of the classification system. Many management
companies have launched funds of funds in the Worldwide and Global sectors, and they also
feature in the South African Equity and Multi Asset sectors. Index funds are also found in a
number of Equity and Multi Asset sectors.
Funds of Funds (FoFs)
A fund of funds (or “FoF” for short) is a unit trust that invests in a range of other unit trusts.
When FoFs were first introduced in 1998, legislation at the time required that funds of funds could have
no more than a 20% exposure to any one unit trust fund. This meant that a FoF had to invest in a
minimum of five component unit trust funds. This requirement has subsequently changed – since
August 1999 funds of funds need only consist of two underlying unit trusts (max 75% in any one fund).
Some funds of funds are designed to suit the needs of investors with a particular risk profile,
and have been described as the “CIS managers’ response to wrap funds”. There are
“aggressive FoFs”, “balanced FoFs” and “managed flexible FoFs”.
There are two main kinds of funds of funds. “In-house” FoFs invest in only the unit trust
funds of a particular unit trust management company. One could say that they carry a
slightly higher investment risk than the FoFs that invest across a range of unit trusts from
different management companies in that they are directly exposed to the “house view” of a
particular management company.
When they were first introduced, the annual management fees of funds of funds tended to
be more expensive than other types of unit trusts because there was a double layer of costs.
However, it is more often the case that “in-house” FoFs dispense with the second layer of
costs and some of the more competitive unit trust management companies absorb the
“second layer costs”.
Sometimes in-house funds of funds are launched to help brokers and retail investors who
have a small lump sum (below R50 000) to get exposure to a wide range of funds.
Funds of funds are required to report in the same way as other unit trusts. Investors can
therefore pick up and track the switches between funds.
Index (Tracker) Funds
Index funds, also known as “passive funds” or “tracker funds”, are rules-based collective
investment schemes that are designed to match the performance of a particular index. The
mandate of these funds is to track the performance of a benchmark index by buying the shares in
that index at their respective weightings. The index fund is therefore a physical replication of the
constituents of the index, and will “track” the movements of the index, rising as the index rises
and falling when the index falls, hence the term “tracker fund”.
The rationale behind these funds becomes clearer when investors understand that, in most
developed markets, it is difficult to outperform the index. Often quoted figures state that only 25%
of US large cap fund managers outperform the S&P 500 over periods of three years or longer.
Different market conditions favour different investment styles, and index funds can be
expected to be in and out of fashion depending mainly on how active fund managers are doing.
However, in developed markets passive funds have become a major force in the industry, with the
amount invested in global passive equity funds ($15.1 trillion) over taking global active equity
funds ($14.3 trillion) by the end of 2023, according to LSEG Lipper quoted by Reuters.

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