Page 45 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Basic Concepts

jurisdiction), and need to be creditable institutions. Anybody who solicits business for a foreign
CIS which is not approved by the registrar is guilty of an offence and is liable to a fine and/or
imprisonment.
While the type of structure used to house a collective investment scheme is not unimportant,
classification according to underlying assets is generally of more interest to investors.
The underlying assets making up the portfolio of a collective investment scheme could include
any or all of the following:
Cash – money “on call” in overnight deposits
Fixed deposits – fixed term interest-bearing investments
Money market instruments – examples are Bankers’ Acceptances and NCDs
Bonds – loan stock issued by government or parastatals
Local equities – JSE listed shares
Offshore equities – shares listed on overseas stock exchanges
Derivatives – geared instruments such as futures, options and warrants
Unit trusts – some CIS portfolios consist of investment in other CISs, such as funds of
funds, which invest in other unit trusts
Property – JSE listed property companies
The names (and classification) of collective investment schemes typically reflect the type of
underlying assets. Classification is dealt with more fully in a later chapter, but some examples are:
A money market fund invests in cash and short-term money market instruments.
A general equity fund invests predominantly in equities (whether local or offshore), but
may, depending on its mandate, also hold bonds, cash, money market instruments, and may
even have a small exposure to derivatives.
A bond fund invests primarily in gilts (government bonds), debentures and other long-term
bonds – again, depending on its mandate.
A hedge fund usually invests mainly in derivative instruments.
Real estate investment trusts (Reits) invest in fixed commercial and industrial
properties, such as factories, office blocks and shopping centres.
A collective investment scheme in participation bonds holds mortgages over property
which are funded by the investors in the scheme. According to CISCA, investments in these
schemes must be for a minimum of five years.
Some categories of underlying assets – such as equities – are themselves highly diverse, and as a
result equity funds are often more narrowly defined. Resources stocks (gold mines and oil
companies, for example) have very different characteristics to financial stocks (such as banks and
insurance companies), so collective investment schemes which specialise in particular areas of the
equity markets are classified more specifically as, for example, resource equity funds and financial
equity funds.
These would be known as “specialist” equity funds, differentiating them from “general” equity
funds, which invest in the shares of all types of listed companies.
In addition to classification according to the types of underlying assets held in the portfolio,
collective investments are also classified according to geographic classes.
Funds can be divided into products that concentrate on local investments, funds that concentrate
on overseas investments, and those that contain a mix of the two. In addition, a narrower focus can
be specified for overseas funds, depending on whether they invest in a specific country or region
overseas (like Europe or America), or whether they spread their investments throughout the world.
ASISA uses the following categories for geographic classification of rand-denominated funds:
South African funds invest mainly in South African assets.
Global funds invest mainly overseas.
Regional funds invest predominantly overseas, but in a specific country or region, like Asia
or the United Kingdom.
Worldwide funds invest in a mix of domestic and overseas assets.

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