Page 133 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Understanding Asset Allocation

South African equity funds are obliged to invest at least 80% of their assets in shares and at
least 60% of their assets in South African equities. Equity fund managers are thus permitted a fair
degree of investment freedom.
Other noteworthy investment restriction of equity funds include the following:
A fund may hold the greater of 10% of a share’s market capitalisation or 120% of a share’s
weighting in the fund’s benchmark – provided that the holding is no more than 20% of the
portfolio (or 35% for specialist funds). The limit is 5% for companies with market caps
below R2 billion.
If a fund’s holding in a company exceeds the above limits because the share price rises, or
because of a compulsory corporate action, the manager is not obliged to sell shares (but he
may not buy any more).
Specialist equity funds (like financial sector funds) must hold investments exclusively in
that sector.
There are limits on the extent to which funds can invest in futures, options, and other
derivative financial instruments (in broad terms, funds can hedge positions but cannot use
derivatives to gear portfolios).
A unit trust fund may invest up to 10% of its assets in unlisted companies provided these
can be valued daily using a recognised methodology.
In order to qualify for pension fund or provident fund investments, unit trust funds are
subject to further conditions. Regulation 28
of the Pension Funds Act stipulates that a Chart 7.3
pension fund may not have more than 75% General Equity Portfolio
of its portfolio invested in equities. Many
funds in the Multi Asset and Interest
Equity investments 80%
Bearing categories are Regulation 28
compliant.
Derivatives 2%
In addition, all management companies
must hold an investment of at least 10% of Cash 5%
the total amount of units in each unit
portfolio, but this can be limited to R1 Bonds 13%
million, subject to the approval of the
executive officer of the FSCA.
The possible composition of a general equity
portfolio is shown in Chart 7.3.
Costs of Equity-Based Schemes
The costs of equity-based unit trusts vary quite considerably. The majority of management
companies no longer charge initial fees.
Initial fees, where applicable, are charged on every new investment, whether lump sum,
monthly debit order, or ad hoc top-up amount. In the case of monthly debit order investment, the
initial fee is deducted from each and every monthly amount. Initial fees also apply to the
reinvestment of distributions.
Annual fees vary from fund type to fund type, as well as across management companies. Fees
range from as low as 10 basis points (0.10%) to over 4% p.a. On the whole, passive funds have
much lower annual fees while global and specialist equity funds have higher fees. For retail fund
classes in the South African–Equity categories the average annual management fee is 0.92%.
Some management companies also apply performance-based annual fees so that fees increase if
the fund manager outperforms a stipulated target (such as the fund’s benchmark). These fee
structures often have a lower and upper limit, eg, a minimum of 0.57% p.a. rising to a maximum of
1.71% for outperformance. Advisors and investors should look closely at performance fee
structures to gauge their fairness, scrutinising particularly whether the performance target
(benchmark) is appropriate and whether a high watermark or rolling period is used in fee
calculation (see page 63). Some funds charge 20% of outperformance of their benchmarks as

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Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts