Page 49 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Basic Concepts

Rand-Denominated and Base Currency
It is common practise internationally for collective investments to disclose their domicile
and base currency. The base currency is the “denominator” of the fund – the currency into
which everything is converted for purposes of valuing the fund’s assets. This does not mean
the fund only invests in that currency – it might hold assets (including cash) in various currencies
around the world.
Due to exchange control regulations, all South African funds are rand-denominated. We are
unlikely to see locally domiciled funds with non-rand base currencies until such time as exchange
controls are lifted. Foreign currency-denominated funds available in South Africa are legally
domiciled overseas and are usually referred to as offshore funds (see Feeder Funds).

A unit trust pools the money of many people and
invests it in shares, bonds, money market instruments Gilt
and other investments. This pool is then divided into A gilt is a government bond. The
identical units (participatory interests), each unit government raises capital for large
containing the same proportion of the assets in the projects by issuing medium and
portfolio. Unit trusts set a minimum investment amount long-term fixed-interest-bearing securities on
–investors canchoosetoinvestalump sumoramonthly the capital market. Gilts are so-called because
debitorder.Lumpsumstypically startatR1000 the issuer (the Government) is regarded as an
(although two managers offer access at R500) and excellent credit risk and therefore offers
minimum monthly debit orders at R200 (although there “gilt-edged security”.
are a handful of funds with minimums of R100 a month).
Unit trust management companies are required to
operate their investments within certain requirements or Equities
mandates, laid down by the Association of Investments
and Savings SA (ASISA) and the Financial Sector Conduct “Equity” usually means stock or
Authority (FSCA). The primary purpose of these mandate shares which represent part of the
requirements is to protect the investments of unit trust funding and ownership of a
holders. Criticsofunittrustspoint to thefactthatsome company. Equity reflects ownership interest in
a company, and the rights to share in the
of these requirements have the effect of limiting the company’s profits. Equity stands in contrast
upside performance of unit trusts. to debt instruments (like bonds or
Given that each unit (or participatory interest) is debentures), which provide funding but do not
exactly equal, and that the sum of all units in a usually confer ownership or a share of profits.
particular unit trust equals the value of the portfolio, it The term is also used to mean the excess in
follows that the value of one unit can be easily value of an asset over any debt or other
calculated by dividing the value of the portfolio by the encumbrance attached to the asset.
number of units in issue. The net asset value of a
portfolio is the market value of the investments in the
portfolio less any liabilities due by the fund (such as
administration costs not yet paid). Income
Another term for the return
Fees received by an investor through
The manager of the unit trust (the management dividends and interest, as
company) is entitled to charge certain fees for the opposed to capital growth. An income unit
services rendered in administering the fund’s affairs trust is one specially designed to produce
and managing the portfolio. A number of types of fees primarily dividends and interest. Income
are used, but the most common are initial charges and reinvestment is the process of adding interest
and dividends to the existing capital sum,
annual service fees.
increasing the value of the investment.
Initial charges, as the term implies, are a once-off fee
applied when units are purchased. Initial charges, which
were commonplace a decade ago, are now rarely imposed
– only a few dozen managers still quote initial fees on
fact sheets, and these usually relate to advisor

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