Page 46 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 2

Foreign, Offshore and Global Funds
CISCA defines offshore CISs as “foreign investment schemes”. We prefer to call them
“offshore” schemes to avoid confusion with rand-denominated global funds. The term
offshore is also slightly problematic though. In other countries, it often has the specific
meaning of a tax haven, but in SA it is used to indicate any overseas domiciled and foreign currency
denominated investment. “Foreign” and “offshore” can be used interchangeably in SA.
An offshore fund (in our terms) is one that is not domiciledinSouth Africa butinanoverseas
jurisdiction. Offshore funds are usually euro, pound or dollar-denominated (ie, the base currency of the
fund is not SA rands). This differs from Global and Regional funds (as defined in the ASISA
classification system), which are rand-denominated SA domiciled funds which invest mostly overseas.
South Africans can invest offshore by using the annual discretionary allowance of R1m per
annum or the R10 million offshore investment allowance. The latter was increased from R2m to
R4m per person in October 2009, and then further increased to R4m per person per calendar year
in November 2010. Since April 2015 the allowance is R10m per person per calendar year. No
documentary evidence needs to be presented to the authorised dealer (eg, the bank) to make use
of the R1m discretionary allowance but a tax clearance from SARS must be obtained before the
offshore investment allowance (ie, amounts exceeding R1m) can be moved overseas.

A similar classification system obviously applies to
A collective investment scheme offshore funds (ie, non rand-denominated funds).
in participation bonds means a An American mutual fund or UK unit trust can also be
scheme where the portfolio classified as “global” or “international” (investing all
consists mainly of participation over the world) or “regional” (investing in one country
bond assets and in which investors acquire or region).
participatory interests in all the participation
bonds included in the scheme. Most major countries do not have exchange control
regulations, and as a result the major differentiation
A “participation bond” is a mortgage bond
over immovable property, and must be a first between local currency denominated funds and others
mortgage. Participation bond schemes by (which we have in SA) is not common overseas.
law have a minimum investment period of Instead, funds disclose their domicile and their base
five years. currency, which may be pounds, dollars, euros, or any
Prior to maturity, participatory interests in other major currency.
bond schemes are traded on a willing buyer
willing seller basis, which typically makes Diversification and Risk
them less liquid than other collective Diversification is a cornerstone of nearly all
investments. investment philosophies. Spreading investments across
a range of shares or assets (ie, not putting all your eggs
in one basket) is the most basic method of reducing risk.
Different types of assets have different levels of risk. Money market instruments are very low risk
(and in fact certain instruments are described as risk free). Equities, on the other hand, are considered
fairly risky – some more so than others. Diversified industrial companies, for example, are considered
less risky than gold mining companies, which are typically at the “high end” of the risk spectrum.
Everyone understands that there is a risk associated with a high-yielding investment – namely,
the risk of something going wrong and losing part or all of one’s investment. But there is also a risk
associated with a conservative investment – the risk that one will not make a real return
and that one’s wealth will gradually be eroded by inflation.

Units and Participatory Interests
The term participatory interest is favoured under the Collective Investment Schemes Control
Act (CISCA) because the Act governs various types of collective investment schemes (CISs).
A CIS is not necessarily a “trust”, and can be a company or other structure. To quote from CISCA,
“Participatory interest means any interest, undivided share or share, whether called participatory
interest, unit, or by any other name…” It is not wrong, therefore, in terms of the Act, to talk about units in
a unit trust, or shares in listed property trust. All denote a type of participatory interest.

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