Page 150 - Profile's Unit Trusts & Collective Investments - March 2026

Chapter 8 Classification of CISs

R Some FoFs are designed to suit the needs of investors with a particular risk profile, and have
been described as the “CIS managers’ response to wrap funds”. There are “aggressive FoFs”,
“balanced FoFs” and “managed flexible FoFs”.There are two main kinds of FoFs. “In-house”
FoFs invest in only the unit trust funds of a particular unit trust management company. One
could say that they carry a slightly higher investment risk than the FoFs that invest across a
range of unit trusts from different management companies in that they are directly exposed to
the “house view” of a particular management company.
R When they were first introduced, the annual management fees of FoFs tended to be more
expensive than other types of unit trusts because there was a double layer of costs. However, it
is more often the case that “in-house” FoFs dispense with the second layer of costs and some
of the more competitive unit trust management companies absorb the “second layer costs”.
R Sometimes in-house FoFs are launched to help brokers and retail investors who have a small
lump sum (below R50 000) to get exposure to a wide range of funds.
R FoFs are required to report in the same way as other unit trusts. Investors can therefore pick up
and track the switches between funds.

Index (Tracker) funds
Index funds, also known as “passive funds” or “tracker funds”, are rules-based collective
investment schemes that are designed to match the performance of a particular index. The mandate
of these funds is to track the performance of a benchmark index by buying the shares in that index at
their respective weightings. The index fund is therefore a physical replication of the constituents of
the index, and will “track” the movements of the index, rising as the index rises and falling when the
index falls, hence the term “tracker fund”.
The rationale behind these funds becomes clearer when investors understand that, in most
developed markets, it is difficult to outperform the index. Often quoted figures state that only 25% of
US large cap fund managers outperform the S&P 500 over periods of three years or longer.
Different market conditions favour different investment styles, and Index funds can be expected
to be in and out of fashion depending mainly on how active fund managers are doing. However,
in developed markets passive funds have become a major force in the industry, with the amount
invested in global passive equity funds (USD15.1 trillion) over taking global active equity funds
(USD14.3 trillion) by the end of 2023, according to LSEG Lipper quoted by Reuters.
In the UK and the US a standard feature of Index funds is their substantially reduced annual
management fees, which adds to the performance of these funds over time. In SA, many passive
funds now cost investors less than 0.5% per annum in ongoing fees and some are available for
as little as 0.10% VAT included. The largest funds in the US have total ongoing charges as low as
0.04% and 0.015% per annum.
It must be stressed that Index funds cannot be compared with one another unless they seek to
follow the same index. The best Index fund is not the one which performs the best in terms of returns,
but the one with the least tracking error – the one that tracks its chosen index the closest.
Index funds around the world track a wide (and increasingly diverse) range of indices, from narrow
regional indices to global indices and smart indices (see below). In SA the most tracked index is the
FTSE/JSE Top40. This index is sometimes skewed in favour mining and commodity stock, which
historically have constituted a disproportionate percentage of the JSE.
Close to 140 rand-denominated unit trusts and exchange traded funds (ETFs) that track indices
are available to investors in SA. They track everything from property, financials and industrials to
specific overseas markets such as Japan, Europe and the US.
Smart indices
Until the early 2000s, most indices around the world were either simple averages (see Dow Jones
box) or, more usually, market cap weighted. Index funds and ETFs that track indices weighted by
market cap are tacitly endorsing the idea that the market price of a share is a good valuation of the
company. The basic assumption of a market cap weighted index is that the market values shares
correctly; the larger the market cap of a stock, therefore, the bigger its influence within the index.

148 Profile’s Unit Trusts & Collective Investments March 2026