Page 42 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 2 Basic concepts

Fund portfolio
Many people talk about a unit trust fund. CISCA favours the term portfolio. What is the
difference?
Both terms can have slightly different meanings in different contexts, but in the context
of unit trusts they both refer to the pool of underlying assets managed on behalf of the unitholders.
In this sense a portfolio manager might say “we are 70% exposed to equities in our fund”.
Some investors will still talk of the portfolio of a unit trust fund (meaning the underlying assets of a unit
trust product). In this sense the word fund is really superfluous.
Diversified industrial companies, for example, are considered less risky than gold mining companies,
which are typically at the “high end” of the risk spectrum.
Everyone understands that there is a risk associated with a high-yielding investment – namely,
the risk of something going wrong and losing part or all of one’s investment. But there is also a risk
associated with a conservative investment – the risk that one will not make a real return and that
one’s wealth will gradually be eroded by inflation.
The relationship of risk and return lies at the heart of the investment management challenge.
Higher-return investment opportunities almost always carry a higher element of risk. Portfolio
managers must strive to achieve above-average returns without exposing investors to undue risks.
Here are some examples of the different types of risk associated with different types of funds
or assets:
R Money market instruments have a low risk of an absolute loss (ie, no risk of a “negative
return” unless the provider defaults), but they do carry a risk of a low “real return”. Over the
long term, an investor who invests only in money market funds carries the risk of not achieving
sufficient investment growth to fund his or her retirement needs. Money market instruments
are also subject to interest rate risk – as interest rates come down, returns on money market
investments reduce.
R Bonds and gilts, like money market instruments,
An open-ended investment company carry interest rate risk – only more so.
(OIC or OEIC) is a structure used in Bond prices change as interest rates go up and
other parts of the world to offer down, with the effect that it is possible to make
investments that are similar to unit significant capital losses in the bond market.
trusts. An OEIC differs from a unit trust in that it is R Stocks and shares (equities) are subject to
structured like a company with share capital and significant sporadic price changes, and certainly
investors become shareholders. It does not have a carry a risk of negative returns. This can be called
trust structure like a unit trust does. market timing risk, because the danger of losing
An OEIC is able to issue different classes of shares money on an investment arises particularly when
to investors, with each class of share representing a you “buy high and sell low”. The reasons for the
separate portfolio, with a distinct investment policy. price fluctuations of equities have to do with a wide
range of economic and commercial factors, each
of which in its own right could be regarded as a type of risk. For example, companies which
employ large labour forces, like gold mines, are subject to the risk of labour unrest, and a major
strike can adversely affect share prices.
R Forex/regional risk can arise if all your assets are exposed to a single region (such as
your home country) and therefore a single currency. A regional spread of investments is
an important part of proper diversification. Political developments in a country or region
can impact both the economy and the currency, as happened in the UK because of Brexit.

The FSCA has power in terms of CISCA to declare a scheme not currently covered under the
Act to be a collective investment scheme.

40 Profile’s Unit Trusts & Collective Investments September 2025