Page 34 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 1

Dividend / Dividend Yield
The dividend is the amount paid per share (usually every six months for listed companies) from the
company’s after tax profits to its shareholders. Companies generally only pay dividends when they are
doing well. Unit trusts invested in shares derive part of their income from dividends paid to the trust by
the companies in which they are invested. They pass this on to unitholders as part of the unit trust distribution
(sometimes also referred to as a dividend, although “distribution” is more accurate as the payment also includes
some interest). Dividends were tax free from 1990 to 2011, but in March 2012 a Dividend Withholding Tax (DWT)
at a flat rate of 15% was introduced. The introduction of DWT coincided with the abolishment of the 10%
Secondary Tax on Companies (STC), itself a form of dividend tax, so the impact on dividend investors was less
onerous than it appeared. DWT was increased to 20% in February 2017.
The dividend yield is a percentage which indicates the dividend payout as a percentage of the share price or unit
price. It is calculated as dividends paid over the past 12 months expressed as a percentage of the latest price. If
the price rises between dividend payouts, the dividend yield falls (because the numerator – the dividend – is fixed
for some months, but the denominator – the price – is rising). Since the introduction of Dividends Withholding
Tax (DWT) in 2012 the published yields for shares and unit trusts usually (but not always) reflect gross dividend
yields / distribution yields before tax.

The comparatively rapid addition of funds in the 1980s, however, paled into insignificance
compared to growth in the 1990s. By the end of 1999 there were 271 rand-denominated unit trusts
(including 11 Namibian funds). Market value of assets under management had risen to R112.8bn.
The huge changes in the industry over time are not only reflected in the number of funds
available and the magnitude of assets under management. The range and type of funds available
has also evolved dramatically in response to changing market conditions and investor needs.
A comparison of collective investment schemes available in the 1970s and the 1990s highlights
some of the massive changes in the industry.
Of the 12 funds available up to the end of 1979, all but one were equity funds. (The exception
was the Standard Bank Extra Income Fund which, as the name suggests, focussed on income
generation rather than capital growth through equity investment.)
By contrast, the range of collective investments available in the 1990s included money market
funds, gilt funds, many specialist equity funds (which focussed on particular sectors),
international funds (which invested in offshore assets), funds of funds, and wrap funds. Not all of
these fell under the Unit Trusts Control Act. Wrap funds, for example, effectively fell under the
ambit of the Stock Exchanges Control Act.
Other forms of collective investments had appeared, such as investment trusts, which were JSE
listed companies that had similar objectives to unit trusts, but whose prices were determined by
supply and demand. Property unit trusts, also a form of collective investment, were governed by
special rules in the Unit Trusts Control Act. Like investment trusts, they were close-ended and
listed on the JSE.
The two main factors that led to this explosion of funds were increased consumer
sophistication and an inevitable product differentiation on the part of management companies.
Increased consumer sophistication led to a demand for more specialist funds. Some investors
were happy with the general equity fund, but others, while still interested in professional asset
management and the other benefits of unit trusts, wanted to choose a narrow asset allocation
range (such as technology stocks, or resources stocks, or interest bearing securities). Management
companies responded by creating unit trusts with narrower mandates that restricted asset
managers to investing in particular types of assets.
Management companies had further incentives for product differentiation. Regardless of fund
manager skills, broad-based equity funds tended to rise and fall with the JSE Overall index (as it
was then called). In the late ’80s and early ’90s, fund managers of general equity funds found fund
performance constrained by the lacklustre performance of mining stocks, which made up a
significant portion of the JSE – to achieve proper diversification, fund managers could not leave

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