Page 156 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 8 Classification of CISs

macro funds take bets on the direction of currencies, major market indices, commodities and
interest rates.

Other types of funds
Two fund types no longer have separate categories in the unit trust classification system – Fund
of Funds and Index funds. These funds merely use different methods for achieving the same
investment mandates as their competitors.
These categories transcend the sectors of the classification system. Many management
companies have launched fund of funds in the Worldwide and Global sectors, and they also feature
in the South African–Equity and Multi Asset sectors. Index funds are also found in a number of
Equity and Multi Asset sectors.
Fund of funds (FoF)
A fund of funds (or “FoF” for short) is a unit trust that invests in a range of other unit trusts.
When FoFs were first introduced in 1998, legislation at the time required that funds of funds could
have no more than a 20% exposure to any one unit trust fund. This meant that a FoF had to invest in
a minimum of five component unit trust funds. This requirement has subsequently changed – since
August 1999 FoFs need only consist of two underlying unit trusts (max 75% in any one fund).
R Some FoFs are designed to suit the needs of investors with a particular risk profile, and have
been described as the “CIS managers’ response to wrap funds”. There are “aggressive FoFs”,
“balanced FoFs” and “managed flexible FoFs”.There are two main kinds of FoFs. “In-house”
FoFs invest in only the unit trust funds of a particular unit trust management company. One
could say that they carry a slightly higher investment risk than the FoFs that invest across a
range of unit trusts from different management companies in that they are directly exposed to
the “house view” of a particular management company.
R When they were first introduced, the annual management fees of FoFs tended to be more
expensive than other types of unit trusts because there was a double layer of costs. However, it
is more often the case that “in-house” FoFs dispense with the second layer of costs and some
of the more competitive unit trust management companies absorb the “second layer costs”.
R Sometimes in-house FoFs are launched to help brokers and retail investors who have a small
lump sum (below R50 000) to get exposure to a wide range of funds.
R FoFs are required to report in the same way as other unit trusts. Investors can therefore pick up
and track the switches between funds.
Index (Tracker) funds
Index funds, also known as “passive funds” or “tracker funds”, are rules-based collective
investment schemes that are designed to match the performance of a particular index. The mandate
of these funds is to track the performance of a benchmark index by buying the shares in that index at
their respective weightings. The Index fund is therefore a physical replication of the constituents of
the index, and will “track” the movements of the index, rising as the index rises and falling when the
index falls, hence the term “tracker fund”.
The rationale behind these funds becomes clearer when investors understand that, in most
developed markets, it is difficult to outperform the index. Often quoted figures state that only 25% of
US large cap fund managers outperform the S&P 500 over periods of three years or longer.
Different market conditions favour different investment styles, and Index funds can be expected
to be in and out of fashion depending mainly on how active fund managers are doing. However,
in developed markets passive funds have become a major force in the industry, with the amount
invested in global passive equity funds (USD15.1 trillion) over taking global active equity funds
(USD14.3 trillion) by the end of 2023, according to LSEG Lipper quoted by Reuters.
In the UK and the US a standard feature of Index funds is their substantially reduced annual
management fees, which adds to the performance of these funds over time. In SA, many passive
funds now cost investors less than 0.5% per annum in ongoing fees and some are available for

154 Profile’s Unit Trusts & Collective Investments September 2025