Page 32 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 1 History of collective investment schemes

Asset Swap
An asset swap is simply where two parties agree to swap the assets which they own. In the
local context this system was used in the light of restrictions placed on investing abroad.
A South African unit trust had to agree to give local assets to a foreign party in return for
foreign assets to the same value. In this way the local trust acquired an overseas asset. There was no
capital outflow from SA and the transaction had no influence on the exchange rate. This system was
terminated in the budget speech of February 2001 and replaced with the foreign portfolio investment
allowance. Under the current exchange control regulations (effective from February 2022); CIS managers
can invest up to 45% of total retail assets under management in foreign assets (this includes allocation
to Africa).
SA (in the early 1990s) were not able to invest offshore.
Instead, these funds focussed on high-quality JSE
Domicile companies which owned significant offshore operations,
The domicile of a fund is the fund’s or derived material contributions to profits from overseas
fixed, permanent, and principal home trade. This included most of SA’s major exporters.
for legal purposes. In SA, the term Deregulation of foreign investment was introduced
“South African fund” (previously “domestic”) means a in several stages. The first relaxation, in July 1995,
fund domiciled in SA and priced in rands. allowed institutions (not individuals) to take 5% of their
assets offshore via an asset swap mechanism. Unit
trust management companies had to comply with government restrictions which placed a 5% limit
on “foreign” investment on each individual unit trust. This was a disadvantage for unit trusts. A life
assurance company, for example, could offer a fully offshore invested endowment policy (by using
the full extent of the foreign investment mechanism, calculated across the life company’s total
assets, applied to one or two products). Unit trusts, however, were limited to 5% of each portfolio.
This anomaly was resolved in March 1997. The asset swap ceiling was raised to 10% for all
institutions, and unit trusts were allowed to invest 10% of their total assets overseas. This meant
they could create funds which could have up to 95% of the money invested offshore (5% needed to
be retained in local cash in line with regulations then in place).
The creation of the asset swap mechanism by the authorities quickly led to the creation of new
products which offered investors “real” offshore investment (rather than a portfolio of “rand hedge”
stocks). These new products were, however, still rand-denominated, SA-domiciled funds, not
foreign-currency funds domiciled in an offshore jurisdiction.
Offshore-domiciled unit trusts began to interest South Africans from July 1997, when the foreign
investment allowance was created. This allowed individuals to invest overseas (provided their tax
affairs were in order).
The demand for offshore unit trusts led to the financial services regulator, the Financial Services
Board (FSB) – now the Financial Sector Conduct Authority (FSCA) – to require registration of
offshore funds. While South Africans, in terms of the foreign investment allowance, are free to invest
in any assets they choose, regulations were created which required offshore funds which wished to
market their products in SA to register with the FSCA.
Greater awareness among the investing public of the global environment and offshore investment
opportunities has had a significant impact on the South African unit trust industry. A wide range
of products are now available which offer direct offshore exposure (both rand-denominated and
foreign-currency funds). In addition, it has become permissible for general unit trusts to have an
element of offshore exposure, a facility which creates new opportunities – and new challenges –
for asset managers.

The crash of 2008 and the Great Recession
Two decades after the crash of 1987, the world saw another major conflagration in equity markets,
caused by a global credit crunch led by the collapse of various debt instruments linked to property
(the sub-prime crisis). This followed a sustained 20-year rise in asset prices.

30 Profile’s Unit Trusts & Collective Investments September 2025