Page 45 - Profile's Unit Trusts & Collective Investments - September 2025

Basic concepts Chapter 2

Time is the best protection
Fund managers are obliged to stick to a number of rules and regulations to ensure that
investors’ money is not exposed to inordinate risk. But management companies cannot
guarantee performance in the share market – investments that fund managers, like all
investors – make into a market like the JSE are subject to the ups and downs of that market. Equity unit
trust investment involves a level of investment risk, which reduces the longer the investment is held.
Given that each unit (or participatory interest) is
exactly equal, and that the sum of all units in a particular Interest
unit trust equals the value of the portfolio, it follows that
the value of one unit can be easily calculated by dividing Although the man-in-the-street might
the value of the portfolio by the number of units in issue. think of interest as something you earn
The net asset value of a portfolio is the market value of on an investment, interest is really the
the investments in the portfolio less any liabilities due by cost of borrowing money (ie, the payment made in
the fund (such as administration costs not yet paid). return for the use of someone else’s money). From the
lender’s viewpoint, interest can be regarded as the
Fees compensation for deferring consumption to a future
The manager of the unit trust (the management period. Interest is expressed as a rate per period of
company) is entitled to charge certain fees for the time, usually one year, in which case it is called an
services rendered in administering the fund’s affairs annual rate of interest. Interest may also be regarded
and managing the portfolio. A number of types of fees as the cost of money to a bank, since that is what the
are used, but the most common is the annual service bank must pay for attracting depositors. The amount
fee. Initial fees were once also common, but are now of interest paid per 100 units of currency is known as
rarely imposed. the interest rate.
Initial charges, as the term implies, are a once-off fee
applied when units are purchased. Only a few dozen
managers still quote initial fees on fact sheets, and these NAV price
usually relate to adviser fees. Usually denominated as a The net asset value (NAV) price of a
percentage of the investment amount, the initial charge unit or participatory interest is the
is deducted before the remaining balance is applied to total net asset value (NAV) of the
the purchase. To give a simplified example, if an investor portfolio divided by the number of units in issue. The
wishes to invest R10 000 and the initial charge is 5% NAV per unit is net of (after the deduction of) annual
(including VAT), the investment statement will reflect management fees.
R9 500 applied to the purchase of units at the NAV price, NAV to NAV performance figures (sometimes denoted
and R500 recovered by the management company by as NAV-NAV) indicate that no deductions have been
way of initial charges. (The statement will also, of course, made for initial fees or adviser fees in calculating
show the number of units bought for R9 500, which will the returns.
typically include fractions of units.)
Annual service fees (which might also be called annual management fees or investment
management fees) are the fees charged by the management company on an ongoing basis for
portfolio management and administration. Excluding a few outliers, annual fees typically range
from 0.5% to 1.75% per annum of the portfolio value (the average is just under 0.9%). Although
expressed as a per annum percentage, this fee is usually recovered monthly or even daily. To give a
simplified example, a fund with a portfolio of R1bn and annual fees of 1.2% per annum will recover
R1m per month from the portfolio.
Other costs and charges may be applied by a fund manager in addition to initial fees and annual
management fees. These are covered in other chapters – see portfolio charges, performance fees,
total expense ratios, trailer fees and switching costs in the index for more details.
Return on investment
The return to the investor from his or her investment in the unit trust comes from two elements:
capital growth and income. Certain kinds of assets, such as shares and property, are subject to
changes in market value, leading to capital gains and capital losses.

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