Page 44 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 2 Basic concepts

Rand-denominated and base currency
It is common practise internationally for collective investments to disclose their domicile
and base currency. The base currency is the denominator of the fund – the currency into
which everything is converted for purposes of valuing the fund’s assets. This does not
mean the fund only invests in that currency – it might hold assets (including cash) in various currencies
around the world.
Due to exchange control regulations, all South African funds are rand-denominated. We are unlikely
to see locally domiciled funds with non-rand based currencies until such time as exchange controls
are lifted. Foreign currency-denominated funds available in SA are legally domiciled overseas and are
usually referred to as offshore funds.
In order to find the balance between risk and
Gilt return, portfolio managers approach diversification
in as scientific a manner as possible, trying to find
A gilt is a government bond. The combinations of asset classes which offer the potential
government raises capital for large of good returns without undue risk.
projects by issuing medium and long
An astute investor must apply the same principles
term fixed interest bearing securities on the capital to his or her own portfolio. Reasonable diversification
market. Gilts are so-called because the issuer (the
Government) is regarded as an excellent credit risk ensures that an investor’s investments are spread
across asset classes like cash, property, bonds, and
and therefore offers a “gilt-edged security”.
equities, and across different regions and currencies,
and possibly even have some small exposure to
derivatives. The appropriate level of exposure to each
Equities asset class depends on a variety of factors such as the
Equity usually means stock or shares investors’ required rate of return, age, earning capacity,
which represent part of the funding health, and so on.
and ownership of a company. Equity
reflects ownership interest in a company, and the How does a unit trust work?
rights to share in the company’s profits. Equity In order to gain a more detailed understanding of the
stands in contrast to debt instruments (like bonds way in which collective investment schemes function,
or debentures), which provide funding but do not this section considers some aspects of the workings
usually confer ownership or a share of profits. The of unit trusts, the most common collective investment
term is also used to mean the excess in value of an scheme in SA.
asset over any debt or other encumbrance attached A unit trust pools the money of many people and invests
to the asset. it in shares, bonds, money market instruments and other
investments. This pool is then divided into identical units
(participatory interests), each unit containing the same
Income proportion of the assets in the portfolio. Unit trusts set a
Another term for the return received minimum investment amount – investors can choose to
by an investor through dividends invest a lump sum or a monthly debit order. Lump sums
and interest, as opposed to capital typically start at R1 000 (although two managers offer
growth. An income unit trust is one specially designed access at R500) and minimum monthly debit orders
to produce primarily dividends and interest. Income at R200 (although there are a handful of funds with
reinvestment is the process of adding interest and minimums of R100 a month).
dividends to the existing capital sum, increasing the Unit trust management companies are required to
value of the investment. operate their investments within the requirements of
CISCA. Each fund must have an investment policy or
mandate (set out in the CIS’ deed) to which it must adhere. The investment mandate must be in line
with the Association for Savings and Investment South Africa (ASISA) unit trust category in which the
fund is classified. The primary purpose of these mandate requirements is to protect the investments
of unit trust holders. Critics of unit trusts point to the fact that some of these requirements have the
effect of limiting the upside performance of unit trusts.

42 Profile’s Unit Trusts & Collective Investments September 2025