Page 110 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 6 Investment risk

Nevertheless, more aggressive funds may choose to exploit these market trends by switching
their investments into sectors that they feel are due for a re-rating. “Playing” the market in this
way demands a much more active approach to investment management – and while it increases
potential returns, also increases risk.
Fund/portfolio manager risk
The performance of any collective investment scheme is at least partly dependent on the decisions
made by the portfolio manager. This is more true of aggressive funds and flexible multi asset funds,
and obviously less true of conservative funds with rigid mandates.
As in any sphere of human endeavour – be it athletics or asset management – some people have
more talent than others. One way of achieving superior returns via collective investments is to follow
the star of a talented portfolio manager. Certainly, some fund managers seem to have a particular
talent for stock picking or market timing, and backing the next “Warren Buffet” could, of course,
lead to superior returns. But the risk is that the next rock-star stock picker turns out to be the next
fallen-star fund manager.
The problem, of course, is that there is no guarantee that a particular portfolio manager’s talents
will stand up under all market conditions. Increasing an investor’s reliance on the skills of a particular
fund manager exposes the investor to the risk of that fund manager failing to perform.
Diversification is, again, the easiest way to reduce fund manager risk. Fund manager risk can be
ameliorated by opting for a multi-manager investment option, or by investing in two or three different
funds with different management styles.

Organisational and asset risk
One aspect of organisational risk is the danger of a fund manager going out of business
or deliberately defrauding investors. While one shouldn’t dismiss this entirely, the collective
investments industry is well-regulated and there is little chance of investors losing money through
fraud or insolvency if they are invested in FSCA-registered funds.
Asset risk is the danger of insolvencies within a fund’s portfolio. The delisting of African Bank
(Abil) in 2014 brought this home to the local market. An asset that has to be written off clearly has a
negative impact on performance. In the case of Abil, which was rescued from insolvency but could
no longer be traded, unit trust holdings in the company had to be ring-fenced via a process known as
side-pocketing. After side-pocketing investors selling unit trusts are left with partial holdings that are
“frozen“ until further notice – in effect, part of the investor’s value cannot be redeemed.
Another aspect of organisational risk relates to the impact of high level policy decisions, mergers,
changes of ownership or major staff movements.
Collective investment schemes are, theoretically, outside of this activity, but there is no doubt that
performance tends to suffer when the umbrella body is in a state of flux.
Asset management teams often report to a controlling life house or institution, and the culture
and management style of the “parent body” can have a considerable impact on the long term
performance of a fund. A good asset management company needs to have a clear and consistent
philosophy, stability of staff, good administrative systems, a research capability and a long term
commitment to the industry. On the other hand, an asset management company cannot afford to
become staid and inflexible, offering no career path to younger fund managers.
One way to judge organisational risk is through the way in which the company deals with investors.
If service levels are poor and reports are late, there is every chance that the same poor standards are
tolerated in the asset management division.
Liquidity risk
Liquidity risk refers to both the liquidity of the cash component of the fund and the liquidity of the
stocks in the fund. The latter is a more technical issue which generally only needs to be considered
for small, focused funds. For example, smaller JSE companies tend to be relatively illiquid (ie, their
shares can be difficult to sell quickly), which makes it difficult for small cap fund managers to adjust
portfolios if small cap stocks fall out of favour, as they did in 1999. Some larger companies are also

108 Profile’s Unit Trusts & Collective Investments September 2025