Page 32 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 1

The advert which appeared in the Financial Mail in June 1965 proclaimed the launch of
South Africa’s first “mutual fund”. It was constituted under the Unit Trusts Control Act, 1947
as amended.
The term “mutual fund”, which is what unit trusts are called in the USA, carried positive
connotations from the American market, where these products had offered investors good returns
for many years.
The differences between mutual funds and unit trusts lie in their structure; the end result for the
investor is much the same.
On a simple level, a unit trust is established as a trust, while a mutual fund has the structure of a
limited liability company. A unit trust is overseen by a trustee company, while in a mutual fund it is
the responsibility of the directors of the mutual fund company to ensure that the fund manager and
the custodian perform their duties in accordance with the constituting documents.

The fledgling industry grew relatively quickly. It offered investors professional management of
assets, spread of risk across a broad portfolio of shares, the ability to liquidate the investment on
demand, low initial investment amounts, tax effectiveness, and low costs compared to other
products available at the time.
The Crash of 1969
The sixties bull run lifted the local market by some 450% between 1961 and 1969, much of the
action occurring in the last two years. By May 1969, the peak of the share market boom, assets
under management in the new unit trust industry had climbed to not far short of R1bn. Inflows
showed a strong rising trend: R45m in 1967, R141m in 1968. The strength of the bull market in
the late sixties is illustrated by the fact that industry sales in May of 1969 – just one month – leaped
to R562m.
Like nearly all stock market declines in South Africa, the crash of 1969 was triggered by a fall in
US markets (in turn triggered by rising inflation, increased deficits from the Vietnam War,
monetary tightening and economic recession). SA’s bull run had been more sustained than that in
the US and as a result the crash in SA was more severe. The SA market also took longer to recover.
The intensity of the final phase of the bull run in South Africa was, however, to have an
unfortunate impact on the industry. The bubble that finally burst in May 1969 left deep scars in the
industry, which, quite literally, took over 10 years to recover. Between May 1969 and October 1971
the JSE fell over 60%. It was not until 1983 that industry assets surpassed their May 1969 level.
The virtual hibernation of the unit trust industry after the ’69 crash was due to a number of factors.
The regulatory authorities adopted a more cautious approach, and discouraged the
management companies from resuming active marketing of unit trusts.
Many members of the public who had lost money in the crash of ’69 lost faith in the power of
share markets to create wealth. Stories
abounded of losses suffered and the
risks of share investment. As all unit
trusts at the time were equity-based,
demand for units virtually dried up.
With industry size drastically reduced
because of falling share prices,
continual repurchases and almost no
new sales, the profitability of running
unit trusts from the point of view of
the management companies was
much diminished. This further
discouraged any early resumption of
marketing and sales efforts.

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