Page 56 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 3 Costs and pricing

Note that only a small minority of funds still apply initial charges (although fees payable to
a financial adviser are handled in the same way where applicable). Where no initial fee or broker
commission (financial adviser fee) is payable, the number of units that will be purchased is simply
the capital amount divided by the NAV unit price.
Cessions
In law, a cession is a way of assigning one’s rights in an asset or property to another legal entity.
In simple terms it can be thought of as the transfer of the claims against one creditor to another
creditor. Although a cessionary has full rights in the ceded assets, a cession is not a transfer of
ownership (the investment remains in the name of the unitholder); it is more like a type of surety.
Where an investor has a holding in a collective investment scheme portfolio, the fund is, from the
investor’s point of view, a debtor (ie, the investor has a claim against the fund equal to the value of
the investment, and this “debt” must be paid to the investor on demand). In legal terms, therefore,
the investor is one of the fund’s creditors.
By completing a cession form an investor is giving an instruction to the fund manager to record a
cession on a unit trust investment (or part of an investment) in favour of another individual or legal
entity (another creditor), to whom the investor thereby cedes the investment.
Most typically, a cession arises when an investor wants to use the participatory interest in a
collective investment scheme as security for a loan provided by another legal entity, such as a bank.
Because of the fluctuating value of investments, particularly equity investments, the cessionary will
often require a pledge value that exceeds the amount being covered.
A cession usually involves at least two separate actions: firstly, the unit holder enters into a
cession agreement with a third party (such as a bank or financial institution); secondly, the unit
holder completes a form provided by the fund manager which serves as an instruction to record a
cession on the investment.
The cession restricts the cedent from transacting on and withdrawing the ceded investment.
As long as the cession remains in place, the cedent may not withdraw, transfer or switch the ceded
units without the written consent from the cessionary.

Charges and costs
Under the old Unit Trusts Control Act (UTCA), the fees paid by investors were divided into three
distinct areas: initial charges, annual service fees and compulsory charges. Under CISCA, initial
fees are levied against an amount to be invested before units are bought at the ruling NAV unit price.
Initial fees are therefore a charge against starting capital. By contrast, annual fees and compulsory
charges are recovered on an ongoing basis from the portfolio (usually monthly but sometimes more
frequently).
Nowadays more than half of all inflows into collective investment schemes are via platforms
(LISPs), which means intermediaries and investors have to understand two levels of costs: those
imposed by the underlying fund manager, and those levied by the platform. Obviously the latter don’t
apply where an investor deals directly with a fund manager.

Initial fees
There has been a huge swing away from initial fees in the unit trust industry, and very few fund
managers or platforms in SA still charge initial fees. Where initial fees are charged it is often for
upfront fees payable to an intermediary for advice services, not to a deduction that flows directly to
the manager or LISP.
In terms of CISCA, charges are completely deregulated, and managers of CISs can, quite
literally, charge whatever they like – provided all costs are fully disclosed. CISCA does not, in fact,
directly address the issue of initial charges. The Act defines what charges can be made by the
manager against the portfolio, but places no limits on what initial charges can be deducted before
participatory interests are purchased. However, as noted it is the norm to not charge initial fees. As at
July 2024 only a tiny minority of local retail funds were still levying any sort of initial fee. This excludes
fees payable to financial advisers and to platforms.

54 Profile’s Unit Trusts & Collective Investments September 2025