Page 132 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 7 Understanding asset allocation

Initial fees, where applicable, are charged on every new investment, whether lump sum, monthly
debit order, or ad hoc top-up amount. In the case of monthly debit order investment, the initial
fee is deducted from each and every monthly amount. Initial fees also apply to the reinvestment
of distributions.
Annual fees vary from fund type to fund type, as well as across management companies. Fees
range from as low as 10 basis points (0.10%) to over 4% per annum. On the whole, passive funds
have much lower annual fees while global and specialist equity funds have higher fees. For retail
fund classes in the South African–Equity categories the average annual management fee is
approximately 0.85%.
Some management companies also apply performance-based annual fees so that fees increase
if the fund manager outperforms a stipulated target (such as the fund’s benchmark). These
fee structures often have a lower and upper limit, eg, a minimum of 0.57% per annum rising to a
maximum of 1.71% for outperformance. Advisers and investors should look closely at performance
fee structures to gauge their fairness, scrutinising particularly whether the performance target
(benchmark) is appropriate and whether a high watermark or rolling period is used in the fee
calculation (see page 58). Some funds charge 20% of outperformance of their benchmarks as
performance fees, and in a few cases these performance fees are uncapped. Even capped fees
– because the cap is usually a fixed percentage (eg, 2%) – can be a sizeable penalty for investors
where market or sector performance is in single digits.
Another possible fee, though not common in SA, is the exit charge, designed to encourage
unitholders to stay invested. Typically, funds with exit charges have low entry costs, but penalise
investors who withdraw early. So a fund might charge a 5% exit fee if you withdraw in the first year;
3% in the second; 1.5% in the third; and no exit fee thereafter.
Property funds
Property investments offer a solution to those investors requiring a high income yield and a refuge
from the volatility of the stock exchange. Investors are faced with a number of options when it comes
to property funds and it is important to understand the differences between the types of funds:
R The ASISA Real Estate sector – the funds you would find under “Unit Trusts” in a media’s
price pages – contains open-ended unit trusts (UTREFs) that, just like other equity funds, buy
shares – but only shares in listed property entities.
R The JSE’s Real Estate sector contains companies and shares that invest or manage property
assets. Confusingly, this includes closed-ended REIT CISs (also referred to as Trust REITs),
previously known as PUTs .
In simple terms, Trust REITs own physical buildings, real estate unit trusts own shares in listed
property companies. By buying shares in a REIT, the investor is effectively buying a stake in a range
of buildings owned by a management company. REITs differ from UTREFs in that they are “closed
ended” and there is no obligation for the fund managers to repurchase units from unitholders.
Both options allow investors to share in professionally managed property portfolios without any of
the disadvantages of direct property ownership.
The subject of property investment generally elicits strong views – there are analysts with firm
opinions both for and against. The traditional view argues that a portfolio should be balanced across
cash (very low risk), equities (for capital growth) and property (low risk and potential capital growth).
Advocates of property investment maintain that property, and particularly property unit trusts,
offer a secure, low risk investment that still offers upside potential (ie, prospects of capital growth).
A contrary opinion would point out that while investment in property has always been an excellent
hedge, the arrival of derivatives has given institutions an alternative means of hedging. There is little
doubt, however, that property is an appropriate investment for certain investors.

Real Estate Unit Trust Funds (UTREFs) and Real Estate Investment
Trusts (REITs)
As mentioned above, investors interested in property are faced with two main options:
Real Estate Unit Trust Funds (UTREFs) and Real Estate Investment Trusts (REITs). Confusingly,

130 Profile’s Unit Trusts & Collective Investments September 2025