Page 144 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 8

Total Return Index (TRI)
A TRI, or Total Return Index, is one which reflects both capital gains and income yield
in one value stream. Most indices quoted in the media are price-based – ie, they are
calculated from price data only. The FTSE/JSE Top 40 index (code J200), for example, is
essentially the average price of the top 40 JSE shares weighted according to market cap. The TRI
version, however (code J200T), adds to these aggregated price movements the effect of dividends
paid by the underlying companies. Typically this is done by reinvesting the income yield into the
price stream. The impact of the reinvestment of dividends can be significant. In the five year bull run
from April 2003 to May 2008, for example, the JSE’s All Share index rose 351%. The Alsi TRI,
however, rose 419%, adding 19% to investment returns. The impact of dividends increases over
time. In the decade from January 2003 to December 2012, for example, the Top 40 index rose
301% while the Top 40 TRI rose 429%, adding 43% to investment returns.
The codes for FTSE/JSE indices append the letter “T” to denote TRI indices (eg, J203T for
the FTSE/JSE All Share TRI index).

For themed funds, 100% of the equity portfolio
(previously a minimum of 80%) must be invested in
P/E Ratio
securities that fall within the theme (eg, financial
The price/earnings ratio (also called shares or industrial shares) at the time of purchase.
the P/E ratio or P/E multiple) is simply
the price of a share divided by its earnings For example, a Resource fund must be at least 80%
in equities at all times (as per the first-tier rule) and
(after-tax profits) per share. The P/E ratio gives
investors an idea of how much they are paying for all of the equities must be resource shares. (More
a company’s earning power. For example, a share detail below.)
selling for R20 with earnings per share of R1 last Multi Asset Funds (previously Asset
year, has a historical P/E ratio of 20. If the same Allocation) invest in a spread of investments in the
share has a projected earnings per share of R2 for equity, capital, money and property equity markets.
the following year, it will have a forward P/E of 10. These funds seek to maximise their total returns (ie,
The higher the P/E, the more “expensive” a share both capital appreciation and income growth) over
relative to its profits. A high P/E usually suggests the long-term. At the third level, this sector has five
the market is expecting good profit growth from sub-sectors: Flexible Funds, High Equity Funds,
the company.
Medium Equity Funds, Low Equity Funds and
Income Funds. As discussed elsewhere, Prudential
funds, which previously had their own sub-sectors
Market Capitalisation within Asset Allocation, are now referred to as
Market capitalisation, or “market Regulation 28 Compliant funds and are “flagged” as
cap” for short, is a measure of a compliant regardless of which sector they are in. The
listed company’s value, calculated by Income Funds sector previously fell under the
multiplying the number of outstanding ordinary Interest Bearing (then Fixed Interest) category; it
shares by the current market price per share. was moved to Multi Asset because some income
Listed shares are usually grouped into four main funds contain small holdings in high dividend shares
market cap categories: large-cap, mid-cap, or other assets that cannot strictly be defined as
small-cap, and micro-cap. interest-bearing securities.
Interest Bearing Funds (previously Fixed
Interest) invest in bonds, money market instruments and other interest-bearing securities. At the
third level there are three sub-sectors in this category: Variable Term Funds, Short Term Funds
and Money Market Funds.
Real Estate Funds invest predominantly in listed property shares, either directly or via other
collective investment schemes in property or real estate investment trusts.
In the remainder of this chapter, we look at each second-tier category in detail, starting with
the equity funds. Remember that each of the second-tier categories can be associated with each of
the first-tier categories. So, for example, you can have South African Equity funds, Worldwide
Equity funds and Global Equity funds.

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