Page 30 - Profile's Unit Trusts & Collective Investments - March 2025

CHAPTER 1

fund performance constrained by the lacklustre
Diversification performance of mining stocks, which made up a
significant portion of the JSE – to achieve proper
The process of spreading investments
among several different instruments diversification, fund managers could not leave
or markets in order to reduce the these out of portfolios. This led to the
overall risk of loss should a single instrument establishment of funds that focussed exclusively on
perform poorly. financial and industrial shares.
Apart from the obvious commercial advantages of
a broader product range which would attract a
broader customer base, general equity funds were to
What is a “wrapper”? a large extent tied to the fortunes of the overall
“Wrapper” is a generic term for a market. The performance of a fund, however, was
diverse range of financial products that largely perceived, at least by the man in the street, as
combine various underlying a function of fund management, with the
investment options into one unit or channel. Some management companies held responsible for
wrappers allow clients to select the underlying performance. Product differentiation helped
investments, others have a fixed structure. management companies to shift the burden of
Common forms are a retirement annuity (RA) performance expectations, at least to some extent, to
wrapper, which may use unit trusts as the building the investor. With a range of general and specialist
blocks for a Regulation 28-compliant product, and funds available across different asset classes and
the tax wrapper, which “wraps” investments inside different geographic areas, investment performance
a tax-efficient vehicle, such as a life assurance, or is now perceived largely as a function of the sector (or
endowment policy.
range of sectors) that an investor chooses.
The Crash of 1987
Just short of two decades after the crash of 1969, world markets experienced another meteoric
rise followed by a dramatic fall in share prices. Unlike 1969, and to the surprise of those investors
who sold out as fast as they could, the markets recovered quickly. Instead of the decade-long
recovery period of 1969, prices rebounded in less than a year following the crash of 1987.
Compared to the crash of 1969, the 1987 fall in JSE prices had a minimal effect on the unit trust
industry.
A major reason for this is that many investors had been in the market for some time. In 1969,
the industry doubled in size in the month of the crash. This meant that half the investors involved
in equity unit trusts had bought close to the peak, making them very exposed to the decline in
prices which followed.
The situation in 1987 was far more balanced. Industry assets had reached R2.7bn by the end of
1986. Although net inflows for 1987 were very strong because of the bull market (over R1bn), the
fact remained that some 70% of unit trust investors had entered the market before prices began to
skyrocket. These investors were less vulnerable to a fall in prices, and were not panicked into
selling. Indeed, investors who had been in the market for some years were typically still showing
positive portfolio appreciation in spite of the 1987 crash. These investors were much more inclined
to give the market a chance to recover – which it did, and with great alacrity.

Advent of Managed Prudential Funds
An important development in the unit trust arena centred on the managed prudential funds
(now known as Regulation 28 Compliant funds), which allowed unit trusts to attract investments
that, historically, had been the preserve of the retirement funding industry.
Prudential funds first appeared as a unit trust sector in 1996. What were known as “managed”
or “balanced” funds were at that time divided into Prudential Funds and Other Managed Funds.
The prudential funds were those managed according to the prescribed asset requirements
applicable to pension funds (specifically, the Prudent Investment Guidelines stipulated in
Regulation 28 of the Pension Funds Act).

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