Page 131 - Profile's Unit Trusts & Collective Investments - September 2025

Understanding asset allocation Chapter 7

It is the riskiness of individual shares which makes the principle of diversification so important for
stock portfolios. Collective investments which hold broad-based portfolios are therefore an ideal
way for smaller investors to achieve adequate diversification across equity sectors.
Equity markets are influenced by the business cycle, although stocks often lead economic trends,
recovering ahead of the economy at the end of a recession, and peaking before the economy during
periods of economic growth. Stock markets are also prone to “herd” behaviour, one of the factors
giving rise to sustained bull and bear markets. In simplistic terms, market optimism tends to carry all
shares higher, and pessimism tends to drive all shares lower, downplaying the riskiness of shares
when times are good and overemphasizing the negatives when times are bad. It is the tendency of
equity investors to cyclically overvalue and undervalue stocks that necessitates long term positions
in order to reap the benefits of equity markets.
South African equity funds are obliged to invest at least 80% of their assets in listed shares and at
least 55% of their assets in South African equities. Equity fund managers are thus permitted a fair
degree of investment freedom.
Other noteworthy investment restrictions on equity funds include the following:
R A fund may hold the greater of 10% of a share’s market capitalisation or 120% of a share’s
weighting in the fund’s benchmark – provided that the holding is no more than 20% of
the portfolio (or 35% for specialist funds). The limit is 5% for companies with market caps
below R2bn.
R If a fund’s holding in a company exceeds the above limits because the share price rises,
or because of a compulsory corporate action, the manager is not obliged to sell shares (but he
may not buy any more).
R Specialist equity funds (like financial sector funds) must hold investments exclusively in that
sector.
R There are limits on the extent to which funds can invest in futures, options, and other derivative
financial instruments (in broad terms, funds can hedge positions but cannot use derivatives
to gear portfolios).
R A unit trust fund may invest up to 10% of its assets in unlisted companies provided these can
be valued daily using a recognised methodology.
R In order to qualify for pension fund or
provident fund investments, unit trust Figure 7.3: General equity portfolio
funds are subject to further conditions.
Regulation 28 of the Pension Funds Act
stipulates that a pension fund may not have
more than 75% of its portfolio invested in
equities. Many funds in the Multi Asset and
Interest Bearing categories are Regulation
28 compliant.
R In addition, in terms of Board Notice 91
under CISCA, all management companies
must hold an investment of at least
13 weeks’ annual fixed expenditure for all
CIS business and seed capital of R1m must
be invested in each portfolio until it reaches a net asset value of R50m for more than six months.
This seed capital must be reinvested if the portfolio drops below R50m for a continuous period of
six months.
The possible composition of a general equity portfolio is shown in Figure 7.3.
Costs of equity-based schemes
The costs of equity-based unit trusts vary quite considerably. The majority of management
companies no longer charge initial fees.

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