Page 52 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 2 Basic concepts

manage one’s own portfolio, and the relatively large amount of capital needed to achieve adequate
diversification. Obviously, direct investment is not ideal for regular monthly contributions – another
advantage of a collective investment scheme for a small investor.
Depending on the securities actually purchased, a direct portfolio may prove less liquid than
a collective investment – the CIS manager is obliged by law to redeem participatory interests
immediately, whereas securities are traded on a willing-buyer-willing-seller basis. When shares are
not traded often, it may take a week or two to convert holdings into cash.
Like collective investment schemes, JSE broking firms are highly regulated, and investors bear
little risk of being victims of fraud if they deal with member firms.

Privately managed portfolios
A private equity portfolio of sufficient size can be entrusted to the care of a stockbroker or asset
manager. After investment objectives and a risk profile are established, shares are bought and sold
on the client’s behalf. Stockbrokers typically charge their clients an annual management fee of at
least 1% of the value of the portfolio. A privately managed portfolio with a stockbroking firm may
or may not attract entry costs (usually no more than 1.5%); these have become highly negotiable
given that many unit trusts no longer charge initial fees. A major disadvantage is the large amount
of capital required (many large broking firms will not accept portfolios under R3m). Another is the
lack of third-party, published performance data for the portfolio management divisions of broking
firms. This can lead to a lack of competition, and a certain complacency when it comes to managing
clients’ money. It also makes it difficult for investors to choose the right firm.
A number of asset management companies also offer privately managed portfolios. These
companies tend to be more expensive because they have to pay for the services of a stockbroker
to execute trades. Unlike broking firms, asset management companies tend to charge an “upfront
fee” as well as an annual service fee (ie, similar to a unit trust). This is sometimes linked to the
performance of the assets under management. Entry level for this type of investment is typically
high with some managers not accepting less than R1m.
Given a good firm, the advantage of this kind of service is personal attention and carefully tailored
investment solutions. Disadvantages include the fact that prices and performance data are usually
not available daily, making it difficult for clients to follow the progress of their investments. Only a few
companies are prepared to quantify their private client returns.
Private asset management companies are not as highly regulated as CISs, and there have been
instances of investors losing their capital in these types of investments.
Structured products
Structured products have been available in SA since the late 1990s. These products use a range
of instruments to offer investors access to equity market returns and capital protection at the same
time. For example, a structured product may promise to deliver the index return if the stock market
goes up, but your money back (less fees) if the market goes down. Many variations are advertised,
including products that cap the upside return and others that only offer capital protection if the
market falls less than 50%.
Structured products usually involve two linked strategies. The first involves buying a zero-coupon
bond which pays out 100% of the capital invested at the end of the term (five years, for example).
The second part is an equity option which provides exposure to upside in the share market without
downside risk. The option is only exercised if the equity index is positive at the end of the term.
Structured products are typically endowment funds and are not regulated as collective investment
schemes. Accordingly, fees are less transparent. They are often built into the defined return
characteristics of the product. Fees should, however, be disclosed in the effective annual cost.
Typical fees are between 2% and 5% of the capital invested over a five-year term.
Structured products usually do not make distributions other than the capital payment at the end
of the term. This is just one of the factors that makes them difficult to evaluate from an investment
point of view. Dividends from shares contribute a significant part of total equity returns over the long
term. Similarly, protection from capital loss is valuable at times, but in a high inflation environment

50 Profile’s Unit Trusts & Collective Investments September 2025