Page 45 - Profile's Unit Trusts & Collective Investments - March 2025

Basic Concepts

Time is the Best Protection
Fund managers are obliged to stick to a number of rules and regulations to ensure that
investors’ money is not exposed to inordinate risk. But management companies cannot
guarantee performance in the share market – investments that fund managers – like all
investors - make into a market like the JSE are subject to the ups and downs of that market. Equity unit
trust investment involves a level of investment risk, which reduces the longer the investment is held.

denominated as a percentage of the investment
amount, the initial charge is deducted before the Interest
remaining balance is applied to the purchase. To give a Although the man-in-the-street might
simplified example, if an investor wishes to invest think of interest as something you
R10 000 and the initial charge is 5% (including VAT), earn on an investment, interest is
the investment statement will reflect R9 500 applied to really the cost of borrowing money (ie, the
the purchase of units at the NAV price, and R500 payment made in return for the use of someone
recovered by the management company by way of else’s money). From the lender’s viewpoint,
initial charges. (The statement will also, of course, interest can be regarded as the compensation for
show the number of units bought for R9 500, which deferring consumption to a future period. Interest
will typically include fractions of units.) is expressed as a rate per period of time, usually
one year, in which case it is called an annual rate
Annual service fees (which might also be called of interest. Interest may also be regarded as the
annual management fees or investment management cost of money to a bank, since that is what the
fees) are the fees charged by the management bank must pay for attracting depositors. The
company on an ongoing basis for portfolio amount of interest paid per 100 units of currency
management and administration. Excluding a few is known as the interest rate.
outliers, annual fees typically range from 0.5% to
1.75% per annum of the portfolio value (the average is
just under 0.9%). Although expressed as a per annum NAV Price
percentage, this fee is usually recovered monthly or
even daily. To give a simplified example, a fund with a The net asset value price of a unit or
portfolio of R1bn and annual fees of 1.2% p.a. will participatory interest is the total net
recover R1m per month from the portfolio. asset value (NAV) of the portfolio divided by the
number of units in issue. The NAV per unit is net of
Other costs and charges may be applied by a fund (after the deduction of) annual management fees.
manager in addition to initial fees and annual NAV to NAV performance figures (sometimes
management fees. These are covered in other denoted as NAV-NAV) indicate that no
chapters – see portfolio charges, performance fees, deductions have been made for initial fees or
total expense ratios, trailer fees and switching costs adviser fees in calculating the returns.
in the index for more details.

Return on Investment
The return to the investor from his or her investment in the unit trust comes from two
elements: capital growth and income. Certain kinds of assets, such as shares and property, are
subject to changes in market value, leading to capital gains and capital losses.
Other assets, like cash, only earn income. If you deposit R1 000 in a savings account, the
“capital” (the R1 000) is fixed, and you earn interest. But if you buy a flat and rent it out, you earn
income (rental), and at the same time the value of the property may rise (a capital gain).
When it comes to unit trusts, capital growth refers to an increase in the price of units which
occurs as the values of underlying investments rise. (Of course, these can also go down, which
could lead to capital losses.)
The income from unit trusts comes from two main sources: dividends and interest. Dividends
are paid by shares, and interest is earned on the cash held in the portfolio. (Although some fund
managers aim to be fully invested, the daily creation and redemption of units within a unit trust
means the fund must always have some cash on hand.)

Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts 43