Page 32 - Profile's Unit Trusts & Collective Investments - March 2025

CHAPTER 1

Asset Swap
An asset swap is simply where two parties agree to swap the assets which they own. In the local
context this system was used in the light of restrictions placed on investing abroad. A South African
unit trust had to agree to give local assets to a foreign party in return for foreign assets to the same
value. In this way the local trust acquired an overseas asset. There was no capital outflow from South Africa and
the transaction had no influence on the exchange rate. This system was terminated in the budget speech of
February 2001 and replaced with the foreign portfolio investment allowance. Under the current exchange control
regulations CIS managers can invest up to 45% of retail assets under management in foreign assets (increased
from 40% plus an additional 10% in Africa in February 2022).

Deregulation of foreign investment was introduced in
several stages. The first relaxation, in July 1995, allowed
Domicile
institutions (not individuals) to take 5% of their assets
The domicile of a fund is the offshore via an asset swap mechanism. Unit trust management
fund’s fixed, permanent, and companies had to comply with government restrictions which
principal home for legal placed a 5% limit on “foreign” investment on each individual
purposes.InSA, theterm“SouthAfrican
Fund” (previously “Domestic”) means a unit trust. This was a disadvantage for unit trusts. A life
fund domiciled in SA and priced in rands. assurance company, for example, could offer a fully offshore
invested endowment policy (by using the full extent of the
foreign investment mechanism, calculated across the life
company’s total assets, applied to one or two products). Unit trusts, however, were limited to 5% of each
portfolio.
This anomaly was resolved in March 1997. The asset swap ceiling was raised to 10% for all
institutions, and unit trusts were allowed to invest 10% of their total assets overseas. This meant they
could create funds which could have up to 95% of the money invested offshore (5% needed to be
retained in local cash in line with regulations then in place).
The creation of the asset swap mechanism by the authorities quickly led to the creation of new
products which offered investors “real” offshore investment (rather than a portfolio of “rand
hedge” stocks). These new products were, however, still rand-denominated, SA-domiciled funds,
not foreign-currency funds domiciled in an offshore jurisdiction.
Offshore-domiciled unit trusts began to interest South Africans from July 1997, when the
foreign investment allowance was created. This allowed individuals to invest overseas (provided
their tax affairs were in order).
The demand for offshore unit trusts led to the financial services regulator, the Financial
Services Board (FSB)(now the Financial Sector Conduct Authority (FSCA)), to require registration
of offshore funds. While South Africans, in terms of the foreign investment allowance, are free to
invest in any assets they choose, regulations were created which required offshore funds which
wished to market their products in South African to register with the FSCA.
Greater awareness among the investing public of the global environment and offshore
investment opportunities has had a significant impact on the South African unit trust industry.
A wide range of products are now available which offer direct offshore exposure (both
rand-denominated and foreign-currency funds). In addition, it has become permissible for general
unit trusts to have an element of offshore exposure, a facility which creates new opportunities –
and new challenges – for asset managers.

The Crash of 2008 and the Great Recession
Two decades after the crash of 1987, the world saw another major conflagration in equity
markets, caused by a global credit crunch led by the collapse of various debt instruments linked to
property (the sub-prime crisis). This followed a sustained 20-year rise in asset prices.
The bull run that effectively started in December 1987 (after the short, sharp crash of the same
year) was truly spectacular. The Dow Jones Industrial Average (DJIA) rose some 550% from 1988
to 1999. In South Africa the JSE’s All Share index (Alsi) rose 450% from February 1988 to April
1998, before declining sharply (nearly 44%) in six months. This fall was followed by another quick

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