Page 37 - Profile's Unit Trusts and Collective Investments 2021 issue 2

History of Collective Investment Schemes

Asset Swap
An asset swap is simply where two parties agree to swap the assets which they own. In the local
context this system was used in the light of restrictions placed on investing abroad. A South African
unit trust had to agree to give local assets to a foreign party in return for foreign assets to the same
value. In this way the local trust acquired an overseas asset. There was no capital outflow from South Africa and
the transaction had no influence on the exchange rate. This system was terminated in the budget speech of
February 2001 and replaced with the foreign portfolio investment allowance. Under the current exchange control
regulations CIS manager companies can invest up to 40% of retail assets under management in foreign assets
(increased from 35% in February 2018), plus an additional 10% in Africa (increased from 5% in February 2018).

on each individual unit trust. This was a disadvantage for
unit trusts. A life assurance company, for example, could
offer a fully offshore invested endowment policy (by using Domicile
the full extent of the foreign investment mechanism, The domicile of a fund is the
calculated across the life house’s total assets, applied to one fund’s fixed, permanent, and
or two products). Unit trusts, however, were limited to 5% principal home for legal
of each portfolio. purposes.InSA, theterm“SouthAfrican
Fund” (previously “Domestic”) means a
This anomaly was resolved in March 1997. The asset
swap ceiling was raised to 10% for all institutions, and unit fund domiciled in SA and priced in rands.
trusts were allowed to invest 10% of their total assets
overseas. This meant they could create funds which could have up to 95% of the money invested
offshore (5% needed to be retained in local cash according to regulations then in place).
The creation of the asset swap mechanism by the authorities quickly led to the creation of new
products which offered investors “real” offshore investment (rather than a portfolio of “rand
hedge” stocks). These new products were, however, still rand-denominated, SA domiciled funds,
not foreign-currency funds domiciled in an offshore jurisdiction.
Offshore domiciled unit trusts became of interest to South Africans from July 1997, when the
foreign investment allowance was created. This allowed individuals to invest overseas (provided
their tax affairs were in order).
The demand for offshore unit trusts led to the establishment of an FSCA registration facility.
While South Africans, in terms of the foreign investment allowance, are free to invest in any assets
they choose, regulations were created which required offshore funds which wished to market their
products in South African to register with the FSCA.
The greater awareness amongst the investing public in the global environment and offshore
investment opportunities has had a significant impact on the South African unit trust industry.
A wide range of products are now available which offer direct offshore exposure (both
rand-denominated and foreign-currency funds). In addition, it has become permissible for general
unit trusts to have an element of offshore exposure, a facility which creates new opportunities –
and new challenges – for asset managers.
The Crash of 2008 and the Great Recession
Two decades after the crash of 1987, the world saw another major conflagration in equity
markets, caused by a global credit crunch led by the collapse of various debt instruments linked to
property (the sub-prime crisis). This followed a sustained 20-year rise in asset prices.
The bull run that effectively started in December 1987 (after the short, sharp crash of the same
year) was truly spectacular. The DJIA rose some 550% from 1988 to 1999. In South Africa the JSE’s
All Share index rose 450% from February 1988 to April 1998, before declining sharply (nearly
44%) in six months. This fall was followed by another quick recovery which, apart from a major
‘correction’ in 2002/3 (the DJIA and Alsi fell 35% and 37% respectively), continued until late
2007. In the US, markets peaked in October 2007; in SA the JSE enjoyed a final burst which took it
to record levels in May 2008 – 20 times what it had been in February 1988.
As with the crash of 1987, the market declines in 1998 and 2002/3 had a relatively muted impact
on the unit trust industry. In 2002, total industry assets still rose 3% in spite of an 11% fall in equity

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