Page 160 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 8

For South Africans, feeder funds are often
Exchange Traded Fund the easiest and most cost-effective way to get
An Exchange Traded Fund (or ETF)isa offshore exposure – the investor can make a
fund which tracks an index but which local investment, denominated in rands,
can be traded on a securities exchange without having to transfer money overseas or
like a share. This allows investors to buy ETFs apply for a tax clearance. The costs associated
through a stockbroker, although some ETFs can also with feeder funds are often lower than those of
issue units or shares directly. Relatively niche offshore investments, especially where currency
products ten years ago, ETFs are now a major – and conversion charges are taken into account.
booming – investment category. Recently passive
funds in the USA have dominated investor interest, One of the possible disadvantages of using a
soaking up the lion’s share of inflows. feeder fund to get offshore exposure is that
capital gains tax might be higher. This is
because of the way CGT is calculated for
offshore investments. With a feeder fund, CGT
Exchange Traded Notes is paid on the gain in rands (ie, effectively
(ETNs)
including currency gains). With an offshore
Like an ETF, an Exchange Traded Note investment, however, CGT is paid on the
(ETN) is an Exchange Traded Product foreign currency gain translated into rands at
(ETP). From the investor’s point of view, an ETN the time of sale. Given the tendency of the rand
looks very much like an ETF: it typically tracks an to weaken against major currencies over the
index, forex rate or commodity price, and it can be
traded on the stock exchange like a share. The key long term, this can mean a substantial CGT
difference between ETFs and ETNs is that with ETNs difference. For example, an investment of
the underlying assets do not belong to the investors. US$1,000 at R14/$ redeemed two years later
Technically, an ETN is not a collective investment with a 20% capital gain with the exchange rate
scheme but a debt instrument – a promise made by having risen to R18/$ would mean, at the
an underwriting bank to pay to the holder of the ETN maximum rate for individuals, R1,368 in CGT
an amount equivalent to the movement in the via the feeder fund, but only R648 in CGT via an
reference index, rate or price, less fees. ETNs are offshore investment (ie, money transferred
therefore subject to credit risk (ie, the risk of default). overseas). Note that this would turn into a
A major advantage of ETNs is that they offer retail disadvantage if the rand strengthened over the
investors access to otherwise inaccessible asset investment period.
categories (such as specific commodities and
frontier markets). They also offer a low tracking error Multi-Manager Funds
(ie, the issuer undertakes to match the movement in
the underlying security, so that before the deduction The multi-manager fund is another fund
of fees the tracking error is zero). “concept” which transcends the ASISA sectors.
Multi-management is about the way in which a
fund is managed rather than the type of assets in which it invests (the latter being the basis of the
ASISA classification).
In the early days of unit trusts each fund had its own fund manager. This “single fund manager”
concept is still the most common management structure today.
Obviously the single fund manager does not work in isolation, but has a support team at the
management company, which may include fundamental, technical and quantitative analysts. Some
management companies use a team approach to manage their funds. In this case no single fund
manager is entirely responsible for one fund. Instead, decisions about asset allocation are made by an
investment committee. Either way, both individual fund managers and investment committees tend to
have a particular investment “style”.
The multi-manager concept grows out of the belief that the investment styles of particular
managers or investment committees are not equally effective under all market conditions. The
particular style of one investment house may produce relatively good performances in a bear market,
while the style of another may produce above average returns in a bull market. Or one style may
excel when bond markets are running, and another when offshore markets are doing well.
The multi-manager fund tries to capitalise on these different strengths by outsourcing the
management of the fund to two or more complementary managers or investment houses.

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