Page 41 - Profile's Unit Trusts & Collective Investments - March 2025

Basic Concepts

Foreign, Offshore and Global Funds
CISCA defines offshore CISs as “foreign investment schemes”. We prefer to call them
“offshore” schemes to avoid confusion with rand-denominated global funds. The term
offshore is also slightly problematic though. In other countries, it often has the specific
meaning of a tax haven, but in SA it is used to indicate any overseas-domiciled and foreign
currency-denominated investment. “Foreign” and “offshore” can be used interchangeably in SA.
An offshore fund (in our terms) is one that is not domiciledinSouth Africa butinanoverseas
jurisdiction. Offshore funds are usually euro-, pound- or dollar-denominated (ie, the base currency of
the fund is not SA rands). This differs from Global funds (as defined in the ASISA classification system),
which are rand-denominated SA-domiciled funds which invest mostly overseas.
South Africans can invest offshore by using the annual discretionary allowance of R1 million or
the R10 million offshore investment allowance per calendar year. The investment allowance was
increased to R2 million in 2003, to R4 million in 2010 and to R10 million in 2015. No documentary
evidence needs to be presented to the authorised exchange control dealer, such as a bank, to
make use of the R1 million discretionary allowance but a tax clearance from SARS must be
obtained before the offshore investment allowance (ie, amounts exceeding R1 million) can be
moved overseas.

A similar classification system obviously applies to
offshore funds (ie, non rand-denominated funds). A collective investment scheme
An American mutual fund or UK unit trust can also be in participation bonds means a
portfolio
the
where
scheme
classified as “global” or “international” (investing all consists mainly of participation
over the world) or “regional” (investing in one country bond assets and in which investors acquire
or region). participatory interests in all the participation
Most major countries do not have exchange control bonds included in the scheme.
regulations, and as a result the major differentiation A “participation bond” is a mortgage bond
between local currency denominated funds and others over immovable property, and must be a first
(which we have in SA) is not common overseas. mortgage. Participation bond schemes by
Instead, funds disclose their domicile and their base law have a minimum investment period of
currency, which may be pounds, dollars, euros, or any five years.
other major currency. Prior to maturity, participatory interests in
bond schemes are traded on a willing-buyer-
Diversification and Risk willing-seller basis, which typically makes
them less liquid than other collective
Diversification is a cornerstone of nearly all
investment philosophies. Spreading investments across investments.
a range of shares or assets (ie, not putting all your eggs
in one basket) is the most basic method of reducing risk.
Different types of assets have different levels of risk. Money market instruments are very low risk.
Equities, on the other hand, are considered fairly risky – some more so than others. Diversified
industrial companies, for example, are considered less risky than gold mining companies, which are
typically at the “high end” of the risk spectrum.
Everyone understands that there is a risk associated with a high-yielding investment – namely,
the risk of something going wrong and losing part or all of one’s investment. But there is also a risk
associated with a conservative investment – the risk that one will not make a real return and that
one’s wealth will gradually be eroded by inflation.

Units and Participatory Interests
The term participatory interest is favoured under the Collective Investment Schemes Control
Act (CISCA) because the Act governs various types of collective investment schemes
(CISs). A CIS is not necessarily a “trust”, and can be a company or other structure. To quote from
CISCA, “Participatory interest means any interest, undivided share or share, whether called participatory
interest, unit, or by any other name…” It is not wrong, therefore, in terms of the Act, to talk about units in
a unit trust, or shares in listed property trust. All denote a type of participatory interest.

Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts 39