Page 130 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 7 Understanding asset allocation

Preference and other shares
When people talk about buying shares, they usually mean the ordinary shares of listed
companies. Ordinary shares, known as common stock in the US, are the most popular
equities because their rights are simple and clear-cut. But they are not the only kinds of
shares. Preference shares, for example, usually entitle the holder to a prior claim on dividends (ie,
before payment is made on ordinary shares), but often don’t have any voting rights. Many preference
shares effectively pay a fixed rate of interest subject to the profitability of the company.
Subject to shareholder approval, companies can create different classes of shares with different
dividend rights and different voting rights. Non-voting ordinary shares (called N-shares) were popular
on the JSE in the 1980s because they allowed controlling shareholders to raise capital without
the risk of losing control of the company. They have the same ownership and dividend rights as
ordinary shares.
Minimum lump sum investments range from R1 000 to R100 000 (with R5 000 and R10 000 the
most common). Debit order minimums range from R200 to R1 000 a month.

Equity funds
Equity-based schemes dominate the CIS industry in SA, with more than three-quarters of funds
on offer being pure equity schemes or having a significant equity component (like multi asset funds).
Equity investments give investors part ownership in listed companies on the JSE (and sometimes,
to a very limited extent, to unlisted companies). Equity-based investments are the most volatile
asset class: the value of investments rises and falls according to the prevailing market conditions.
Historical analysis, however, indicates that returns on equity investments have been superior to any
other class of investment over the long term.
Equity-based investments reward investors in two ways: they offer capital gains as the share
price increases, and they offer dividends, which is the portion of profits that a company chooses to
pay to shareholders.
Underlying investments of equity-based schemes
The bulk of equity investments held in South African collective investment schemes are ordinary
shares listed on the JSE and some overseas stock exchanges. Ordinary shares represent
ownership in a limited liability company, entitling shareholders to dividends paid by the company.
Usually, each ordinary share carries a single vote. Shareholders appoint company directors at an
annual general meeting, and the directors of large companies act (or are meant to act) in the interests
of shareholders.
Shares are such popular securities around the
world because they give investors a simple method
of participating in the wealth-generating potential
of big businesses. Shareholders are part-owners
of a business, no matter how small their stake, and
they ultimately share in the profits of the business.
Growing companies offer profit potential
unequalled in other areas of investment. There are
many examples of shares that have grown tenfold
in a decade, and many listed companies can
sustain growth rates of 30% per annum or more
under the right economic conditions. It is these
outstanding returns that maintain investor interest
in equities.
Unfortunately, businesses are complex, and predicting which companies will make big profits and
keep growing is notoriously difficult. When it comes to equity markets, there is also the very real risk
of investing in a business which goes bankrupt, leaving shareholders with nothing. It is this high risk/
high return character of equity markets which makes them so volatile and unpredictable.

128 Profile’s Unit Trusts & Collective Investments September 2025