Page 151 - Profile's Unit Trusts & Collective Investments - March 2026

Classification of CISs Chapter 8

Dow Jones Industrial Average (DJIA)
The DJIA is an index of approximately 30 blue chip US stocks. At over 100 years, it is the oldest
continuing US market index. It is called an average because it was originally computed by
adding up stock prices and dividing by the number of stocks. (The very first average price of
industrial stocks, on 26 May 1896, was 40.94.) The methodology remains the same today, but the divisor
has been changed to preserve historical continuity. The DJIA is the best-known market indicator in the
world, partly because it is old enough that many generations of investors have become accustomed to
quoting it, and partly because the US stock market is the globe’s biggest.
Overseas, there are many index funds which track the DJIA.
Smart indices (also known as smart beta indices) take the view that the share price is not
necessarily the best reflection of a company’s value. The Rafi, for example, is an index created by
US-based Research Affiliates using fundamental valuation criteria – metrics such as sales, cashflow,
book value and dividends. This can change not only the index constituents but also the weighting of
shares within the index. In 2024, for example, the Rafi40 included four shares not in the Top40, and
the latter included five shares not in the Rafi40.
Beta refers to the return of “the market”, and market cap weighted indices are the accepted proxy
for “the market”. The term “smart beta” derives from the idea that there are other ways to represent
“the market” and better ways to construct indices. Market cap weighted indices automatically
overweight overvalued stocks and underweight under-valued stocks; by focussing on other
factors, smart beta developers believe they can create cleverer indices designed to outperform
conventional indices.
More than 20 collective investments in SA track smart indices. The underlying indices include the
Rafi and the DIVI.

Feeder funds
A feeder fund is one of several types of conduit funds that act as channels for investments into
larger funds.
The principal (or receiving fund) is sometimes called an umbrella fund or “master” fund.
This tiered structure is also sometimes used by hedge funds to create critical mass by pooling
investment capital from different sources.
Returns from the master fund, such as dividends and capital gains, are distributed to the feeder
funds on a pro-rata basis.
In the South African environment, some feeder funds have a one-to-one relationship with
the master fund. In these cases the feeder fund is created in order to have a rand-denominated
investment vehicle in SA while the underlying assets are held overseas and priced in their respective
base currencies.
Feeder funds for retail hedge funds were not possible until February 2024 when the FSCA
amended an its earlier Board Notice 52 of 2015 that prohibited Retail Hedge funds from investing
more than 75% of the fund in a single portfolio.
For South Africans, feeder funds are often the easiest and most cost-effective way to get offshore
exposure – the investor can make a local investment, denominated in rands, without having to
transfer money overseas or apply for a tax clearance. The costs associated with feeder funds are
often lower than those of offshore investments, especially where currency conversion charges are
taken into account.

The DIVI
In the name of a passive fund, DIVI usually refers to the JSE’s Dividend Plus index, which
contains the30 shares with the highest forecast dividend yields. The index is weighted by
dividends, which means that the DIVI is effectively a value style index.

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