Page 47 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Basic Concepts

Fund Portfolio
Many people talk about a unit trust fund. CISCA favours the term portfolio. What is the
difference?
Both terms can have slightly different meanings in different contexts, but in the context
of unit trusts they both refer to the pool of underlying assets managed on behalf of the unitholders.
In this sense a portfolio manager might say “we are 70% exposed to equities in our fund.”
Some investors will still talk of the portfolio of a unit trust fund (meaning the underlying assets of a
unit trust product). In this sense the word ‘fund’ is really superfluous.

The relationship of risk and return lies at the heart of the investment management challenge.
Higher-return investment opportunities almost always carry a higher element of risk. Portfolio
managers must strive to achieve above-average returns without exposing investors to undue risks.
Here are some examples of the different types of risk associated with different types of funds or
assets:
Money market instruments have no risk of an absolute loss (ie, no risk of a “negative
return” on investment), but they do carry a risk of a low “real return”. Over the long-term,
an investor of average income who invests only in money market funds carries the risk of
not achieving sufficient investment growth to fund retirement needs. Money market
instruments are also subject to interest rate risk – as interest rates come down, returns on
money market investments reduce.
Bonds and gilts, like money market instruments, carry interest rate risk – only more so.
Bond prices change as interest rates go up and down, with the effect that it is possible to
make significant capital losses in the bond market.
Stocks and shares (equities) are subject to significant sporadic price changes, and
certainly carry a risk of negative returns. This can be called market timing risk, because the
danger of losing money on an investment arises particularly when you “buy high and sell
low”. The reasons for the price fluctuations of equities have to do with a wide range of
economic and commercial factors, each of which in its own right could be regarded as a type
of risk. For example, companies which employ large labour forces, like gold mines, are
subject to the risk of labour unrest, and a major strike can adversely affect share prices.
Forex/regional risk can arise if all your assets are exposed to a single region (such as your
home country) and therefore a single currency. A regional spread of investments is an
important part of proper diversification. Political developments in a country or region can
impact both the economy and the currency, as happened in the UK because of Brexit.
Sterling weakened against other major currencies, leaving British investors who did not
diversify into non-UK assets with investments that significantly underperformed in global
terms. A similar problem faces South Africans, who have been affected by a stagnant
economy and weak rand. The high volatility of non-SA Interest Bearing funds
you see in Chart 6.10, for example, is mainly due to
the gyrations of the rand rather than the volatility of An open-ended investment
the underlying overseas assets.
company (OIC or OEIC) is a
Derivatives (such as futures and options), because company with an authorised
they are traded “on margin”, amplify the risks share capital which is
inherent in underlying assets. For the same initial structured in such a manner that it
cash outlay, the gearing of derivatives can provide provides for the issuing of different
ten times the exposure to market movements. This classes of shares to investors, each class
makes them much more sensitive to price changes of share representing a separate portfolio
in underlying assets and potentially very risky. with a distinct investment policy.
However, where derivatives are used appropriately
as hedging instruments, they can in fact reduce the
overall riskiness of a portfolio.

The category of declared collective investment schemes allows the registrar to declare a
scheme not currently covered under the Act to be a collective investment scheme.

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