Page 52 - Profile's Unit Trusts & Collective Investments - March 2025

CHAPTER 2

“upfront fee” as well as an annual service fee (ie, similar to a unit trust). This is sometimes
linked to the performance of the assets under management. Entry level for this type of
investment is typically high with some managers not accepting less than R1 million.
Given a good firm, the advantage of this kind of service is personal attention and carefully
tailored investment solutions. Disadvantages include the fact that prices and performance data
are usually not available daily, making it difficult for clients to follow the progress of their
investments. Only a few companies are prepared to quantify their private client returns.
Private asset management companies are not as highly regulated as collective investment schemes,
and there have been instances of investors losing their capital in these types of investments.
Structured Products
Structured products have been available in South Africa since the late 1990s. These products
use a range of instruments to offer investors access to equity market returns and capital protection
at the same time. For example, a structured product may promise to deliver the index return if the
stock market goes up but your money back (less fees) if the market goes down. Many variations are
advertised, including products that cap the upside return and others that only offer capital
protection if the market falls less than 50%.
Structured products usually involve two linked strategies. The first involves buying a zero-coupon
bond which pays out 100 percent of the capital invested at the end of the term (five years, for example).
The second part is an equity option which provides exposure to upside in the share market without
downside risk. The option is only exercised if the equity index is positive at the end of the term.
Structured products are typically endowment funds and are not regulated as collective
investment schemes. Accordingly, fees are less transparent. They are often built into the defined
return characteristics of the product. Fees should, however, be disclosed in the effective annual
cost. Typical fees are between 2% and 5% of the capital invested over a five-year term.
Structured products usually do not make distributions other than the capital payment at the
end of the term. This is just one of the factors that makes them difficult to evaluate from an
investment point of view. Dividends from shares contribute a significant part of total equity
returns over the long term. Similarly, protection from capital loss is valuable at times, but in a high
inflation environment the preservation of an initial investment with no growth can represent a
significant capital loss in real terms over five years.
Investment Trusts
An investment trust is not a trust at all; it is a listed holding company that invests in other
companies listed on the stock exchange. Investment trusts fall under the provisions of the Companies
Act rather than the Collective Investment Schemes Control Act. The introduction of Capital Gains Tax
(CGT) in 2001 effectively shut down SA’s only surviving investment trust (Genbel).
Until the introduction of CGT, investment trusts were almost as easy to buy as unit trusts. The
main reason for their relative lack of popularity in South Africa was that they were never actively
marketed and were never sold by sales teams earning commission. South Africa’s biggest
investment trust, Genbel, even initiated a scheme enabling investors to buy shares via monthly
debit order, which proved very successful.
In spite of lobbying by Genbel, the tax authorities refused to extend the CGT exemption
granted to unit trusts to investment trusts. This meant that investors in investment trusts would
effectively pay CGT twice: the investment trust itself would pay CGT on the profits of share
investment, and the unit holder would pay CGT again on any profits made by holding the units.
Unit trusts are exempt from CGT, which is levied on the unit holder and not at fund level.
While investment trusts in a formal sense no longer exist in South Africa, there are still diversified
companies listed on the JSE. A company like Bidvest, for example, owns businesses in a wide range of
industry sectors, from automotive and shipping to banking, insurance and office furniture. This spread
of investments provides a level of diversification not dissimilar to some specialist unit trusts. It might
also be argued that, in South Africa, exchange traded funds (ETFs) – which can be traded on the JSE
like other shares – have filled the gap left behind by investment trusts.
Shares in diversified listed holding companies and ETFs are bought through a stockbroker.
Typical entry costs amount to less than one percent, and may be as low as half a percent. This
compares favourably to the average entry costs of those unit trusts that still levy initial fees,

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