Page 35 - Profile's Unit Trusts and Collective Investments 2021 issue 2

History of Collective Investment Schemes

these out of portfolios. This led to the
establishment of funds that focussed exclusively on Diversification
financial and industrial shares.
The process of spreading investments
Apart from the obvious commercial advantages of among several different instruments or
a broader product range which would attract a markets in order to reduce the overall
broader customer base, general equity funds were to risk of loss should a single instrument perform
a large extent tied to the fortunes of the overall poorly.
market. The performance of a fund, however, was
largely perceived, at least by the man in the street, as
a function of fund management, with the
management companies held responsible for What is a “wrapper”?
performance. Product differentiation helped
management companies to shift the burden of “Wrapper” is a generic term for a
performance expectations, at least to some extent, to diverse range of financial products that
combine
underlying
various
the investor. With a range of general and specialist investment options into one unit or channel.
funds available across different asset classes and Some wrappers allow clients to select the
different geographic areas, investment performance is underlying investments, others have a fixed
now perceived largely as a function of the sector (or structure. Common forms are the retirement
range of sectors) that an investor chooses. annuity (RA) wrapper, which may use unit trusts
as the building blocks for a Reg 28 compliant
The Crash of ’87 product, and the tax wrapper, which ‘wraps’
investments inside a tax vehicle such as a life
Just short of two decades after the crash of ’69, assurance or endowment policy.
world markets experienced another meteoric rise
followed by a dramatic fall in share prices. Unlike
’69, and to the surprise of those investors who sold out as fast as they could, the markets recovered
quickly. Instead of the decade-long recovery period of ’69, prices rebounded in less than a year
following the crash of ’87.
Compared to the crash of ’69, the ’87 fall in JSE prices had a minimal effect on the unit trust industry.
A major reason for this is that many investors had been in the market for some time. In 1969,
the industry doubled in size in the month of the crash. This meant that half the investors involved
in equity unit trusts had bought close to the peak, making them very exposed to the decline in
prices which followed.
The situation in 1987 was far more balanced. Industry assets had reached R2.7bn by the end of
1986. Although net inflows for ’87 were very strong because of the bull market (over R1bn), the
fact remained that some 70% of unit trust investors had entered the market before prices began to
skyrocket. These investors were less vulnerable to a fall in prices, and were not panicked into
selling. Indeed, investors who had been in the market for some years were typically still showing
positive portfolio appreciation in spite of the ’87 crash. These investors were much more inclined
to give the market a chance to recover – which it did, and with great alacrity.

Advent of Managed Prudential Funds
An important development in the unit trust arena centred on the managed prudential funds
(now known as Reg 28 Compliant funds), which allowed unit trusts to attract investments that,
historically, had been the preserve of the retirement funding industry.
Prudential funds first appeared as a unit trust sector in 1996. What were known as “managed”
or “balanced” funds were at that time divided into Prudential Funds and Other Managed Funds.
The prudential funds were those managed according to the prescribed asset requirements
applicable to pension funds (specifically, the Prudent Investment Guidelines stipulated in
Regulation 28 of the Pension Funds Act).
The advent of prudential funds allowed the unit trust industry to target the retirement funding
market, both through specific prudential funds and through a range of linked products which had
unit trusts as their underlying assets. Where unit trusts had been seen as relatively high-risk
investments which would have been considered as an addition to a retirement funding plan,

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