Page 158 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 8 Classification of CISs

More than 10 collective investments in SA track smart indices. The underlying indices include
the Rafi, the SWIX and the DIVI (see box on previous page).

Feeder funds
A feeder fund is one of several types of conduit funds that act as channels for investments into
larger funds.
The principal (or receiving fund) is sometimes called an umbrella fund or “master” fund.
This tiered structure is also sometimes used by hedge funds to create critical mass by pooling
investment capital from different sources.
Returns from the master fund, such as dividends and capital gains, are distributed to the feeder
funds on a pro-rata basis.
In the South African environment, some feeder funds have a one-to-one relationship with
the master fund. In these cases the feeder fund is created in order to have a rand-denominated
investment vehicle in SA while the underlying assets are held overseas and priced in their respective
base currencies.
Feeder funds for retail hedge funds were not possible until February 2024 when the FSCA
amended an its earlier Board Notice 52 of 2015 that prohibited Retail Hedge funds from investing
more than 75% of the fund in a single portfolio.
For South Africans, feeder funds are often the easiest and most cost-effective way to get offshore
exposure – the investor can make a local investment, denominated in rands, without having to
transfer money overseas or apply for a tax clearance. The costs associated with feeder funds are
often lower than those of offshore investments, especially where currency conversion charges are
taken into account.
One of the possible disadvantages of using a feeder fund to get offshore exposure is that
capital gains tax (CGT) might be higher. This is because of the way CGT is calculated for offshore
investments. With a feeder fund, CGT is paid on the gain in rands (ie, effectively including currency
gains). With an offshore investment, however, CGT is paid on the foreign currency gain translated
into rands at the time of sale. Given the tendency of the rand to weaken against major currencies
over the long term, this can mean a substantial CGT difference. For example, an investment of USD1
000 at R14/USD redeemed two years later with a 20% capital gain with the exchange rate having
risen to R18/USD would mean, at the maximum marginal tax rate for individuals, R1 368 in CGT via
the feeder fund, but only R648 in CGT via an offshore investment (ie, money transferred overseas).
Note that this would turn into a disadvantage if the rand strengthened over the investment period.
Multi Manager funds
The Multi Manager fund is another fund “concept” which transcends the ASISA sectors. Multi
management is about the way in which a fund is managed rather than the type of assets in which it
invests (the latter being the basis of the ASISA classification).
In the early days of unit trusts each fund had its own fund manager. This “single fund manager”
concept is still the most common management structure today.
Obviously the single fund manager does not work in isolation, but has a support team at the
management company, which may include fundamental, technical and quantitative analysts.
Some management companies use a team approach to manage their funds. In this case no single
fund manager is entirely responsible for one fund. Instead, decisions about asset allocation are
made by an investment committee. Either way, both individual fund managers and investment
committees tend to have a particular investment “style”.
The multi manager concept grows out of the belief that the investment styles of particular managers
or investment committees are not equally effective under all market conditions. The particular style
of one investment house may produce relatively good performances in a bear market, while the style
of another may produce above average returns in a bull market. Or one style may excel when bond
markets are running, and another when offshore markets are doing well.

156 Profile’s Unit Trusts & Collective Investments September 2025