Page 42 - Profile's Unit Trusts & Collective Investments - March 2025

CHAPTER 2

Fund Portfolio
Many people talk about a unit trust fund. CISCA favours the term portfolio. What is the
difference?
Both terms can have slightly different meanings in different contexts, but in the context
of unit trusts they both refer to the pool of underlying assets managed on behalf of the unitholders.
In this sense a portfolio manager might say “we are 70% exposed to equities in our fund”.
Some investors will still talk of the portfolio of a unit trust fund (meaning the underlying assets of a
unit trust product). In this sense the word ‘fund’ is really superfluous.

The relationship of risk and return lies at the heart of the investment management challenge.
Higher-return investment opportunities almost always carry a higher element of risk. Portfolio
managers must strive to achieve above-average returns without exposing investors to undue risks.
Here are some examples of the different types of risk associated with different types of funds or assets:
Money market instruments have a low risk of an absolute loss (ie, no risk of a “negative
return” unless the provider defaults), but they do carry a risk of a low “real return”. Over
the long-term, an investor who invests only in money market funds carries the risk of not
achieving sufficient investment growth to fund his or her retirement needs. Money market
instruments are also subject to interest rate risk – as interest rates come down, returns on
money market investments reduce.
Bonds and gilts, like money market instruments, carry interest rate risk – only more so.
Bond prices change as interest rates go up and down, with the effect that it is possible to
make significant capital losses in the bond market.
Stocks and shares (equities) are subject to significant sporadic price changes, and
certainly carry a risk of negative returns. This can be called market timing risk, because the
danger of losing money on an investment arises particularly when you “buy high and sell
low”. The reasons for the price fluctuations of equities have to do with a wide range of
economic and commercial factors, each of which in its own right could be regarded as a type
of risk. For example, companies which employ large labour forces, like gold mines, are
subject to the risk of labour unrest, and a major strike can adversely affect share prices.
Forex/regional risk can arise if all your assets are exposed to a single region (such as your
home country) and therefore a single currency. A regional spread of investments is an
important part of proper diversification. Political developments in a country or region can
impact both the economy and the currency, as happened
in the UK because of Brexit. Sterling weakened against
An open-ended investment other major currencies, leaving British investors who did
company (OIC or OEIC) is a not diversify into non-UK assets with investments that
structure used in other parts significantly underperformed in global terms. A similar
of the world to offer problem faces South Africans, who have been affected by
investments that are similar to
unit trusts. An OEIC differs from a unit a stagnant economy and weak rand. The high volatility of
non-SA Interest Bearing funds you see in Chart 6.10,for
trust in that it is structured like a company
with share capital and investors become example, is mainly due to the gyrations of the rand rather
shareholders. It does not have a trust than the volatility of the underlying overseas assets.
structure like a unit trust does. Derivatives (such as futures and options), because they
are traded “on margin”, amplify the risks inherent in
An OEIC is able to issue different classes
of shares to investors, with each class of underlying assets. For the same initial cash outlay, the
share representing a separate portfolio, gearing of derivatives can provide ten times the
with a distinct investment policy. exposure to market movements. This makes them much
more sensitive to price changes in underlying assets and
potentially very risky. However, where derivatives are
used appropriately as hedging instruments, they can in fact reduce the overall
riskiness of a portfolio.

The FSCA has power in terms of CISCA to declare a scheme not currently covered under
the Act to be a collective investment scheme.

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