Page 161 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Classification of CISs

Multi-managed funds typically have a greater level of diversification compared to single
manager funds and therefore lower active risk (ie, non-market risk) than single manager funds.
There are two main types of multi-manager funds: funds of funds and “manager of managers”
type funds. Note that not all funds of funds are explicitly multi-manager funds in the true sense: to
qualify as a multi-managed fund the manager must be choosing underlying funds specifically on
fund manager and style criteria rather than asset allocation criteria.
Exchange Traded Funds (ETFs)
An Exchange Traded Fund (ETF) is a special kind of tracker (index) fund which is listed on a
stock exchange and can be traded like a share.
The majority (but not all) ETFs listed on the JSE are also registered as collective investment
schemes, in effect creating two markets for these funds.
South Africa’s first ETF, the Satrix 40, was launched in November 2000. It tracks the FTSE/JSE
Top 40 index. Since the launch of the Satrix 40 the JSE’s ETF sector has grown to over 80 funds,
including sector-specific ETFs, funds that track overseas and global indices, and even a fund that
tracks the rand.
From a fund management point of view, ETFs are very similar to other index funds: they
replicate the weighted constituents of an index in a physical portfolio, benefiting from market
movements, and collecting and paying dividends.
From the investor’s point of view, ETFs have several features which differentiate them from
unit trusts.
ETFs can be bought and sold through a stockbroker as they trade all day like any other share
so investors can take advantage of intra-day market movements and the ETF prices are
always visible and transparent. Unit trusts effectively only trade once a day after the market
closes.
Unit trust investors buy and sell at the previous day’s “closing price” (ie, the NAV unit price
as calculated by the fund). ETF investors trade at a market price determined by supply and
demand (although this is usually very close to NAV – see below).
ETFs allow large investors to “cash out” or redeem an investment by taking a basket of
shares in proportion to the ETFs holdings. Unit trusts can only repurchase units for cash.
(This ability to “cash in” ETF units for underlying shares creates arbitrage opportunities
which ensure that ETFs usually trade at NAV.)
Settlement of ETFs in South Africa is via the JSE/STRATE settlement and clearing systems,
which takes three business days. Unit trusts can usually be liquidated in 24 to 48 hours,
although the actual time varies from one manager to another.
Both ETFs and unit trust index funds, as collective investment schemes, must publish NAV
prices on a daily basis. The JSE does allow ETFs to trade directly with clients for large orders. In
this case, the transaction must be done at the NAV price, as per the CISCA rules.
Arbitrage ensures that ETFs trade very close to NAV. In the event of a mispricing (ie, a
discrepancy between the NAV of the ETF and the market price):
investors may swap Satrix for a physical basket of shares, which can then be traded in the
market to take advantage of the mispricing;
investors may arbitrage between the market (spot) price of the ETF and the futures contract
on the index. (SAFEX, the futures market and SETS, the spot equities market, operate on
the same JSE trading platform, which facilitates this type of trade.)
In addition, official market makers are appointed by the ETF managers to provide market
liquidity and to ensure that the ETFs trade at or close to fair value (NAV).
From a cost point of view, ETFs and other tracker funds compete directly with each other, and
this is reflected in their competitive pricing structures. As with most CIS products, the final cost to
the investor depends on various factors. In general, for the retail investor, ETFs bought via a
stockbroker are cheaper than buying unit trust index funds directly from a CIS manager, but a unit
trust index fund bought through a LISP offering zero or low initial charges may be cheaper than

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