Page 50 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 2

Time is the Best Protection
Fund managers are obliged to stick to a number of rules and regulations to ensure that
investors’ money is not exposed to inordinate risk. But management companies cannot
guarantee performance in the share market – like all investors, they are subject to the ups
and downs of the JSE. Equity unit trust investment involves a level of investment risk, which reduces
the longer the investment is held.

commissions. Usually denominated as a percentage of
Interest the investment amount, the initial charge is deducted
before the remaining balance is applied to the
Although the man-in-the-street might purchase. To give a simplified example, if an investor
think of interest as something you wishes to invest R10 000 and the initial charge is 5%
earn on an investment, interest is
really the cost of borrowing money (ie, the (including Vat), the investment statement will reflect
payment made in return for the use of someone R9 500 applied to the purchase of units at the NAV
else’s money). From the lender’s viewpoint, price, and R500 recovered by the management
interest can be regarded as the compensation for company by way of initial charges. (The statement will
deferring consumption to a future period. Interest also, of course, show the number of units bought for
is expressed as a rate per period of time, usually R9 500, which will typically include fractions of units.)
one year, in which case it is called an annual rate Annual service fees (which might also be called
of interest. Interest may also be regarded as the annual management fees or investment management
cost of money to a bank, since that is what the fees) are the fees charged by the management
bank must pay for attracting depositors. The
amount of interest paid per 100 units of currency company on an ongoing basis for portfolio
is known as the interest rate. management and administration. Excluding a few
outliers, annual fees typically range from 0.2% to
1.75% per annum of the portfolio value (the average is
just under 0.9%). Although expressed as a per annum
NAV Price percentage, this fee is usually recovered monthly or
The net asset value price of a unit or even daily. To give a simplified example, a fund with a
participatory interest is the total net portfolio of R1bn and annual fees of 1.2% p.a. will
asset value (NAV) of the portfolio recover R1m per month from the portfolio.
divided by the number of units in issue. NAV per Other costs and charges may be applied by a fund
unit is net of (after deduction of) annual
management fees. manager in addition to initial fees and annual
management fees. These are covered in other chapters
NAV to NAV performance figures (sometimes – see portfolio charges, performance fees, TERs,
denoted as NAV-NAV) indicate that no deduction
has been made for initial fees or broker trailer fees and switching costs in the index for more
commissions in calculating returns. details.
Return on Investment
The return to the investor from his or her investment in the unit trust comes from two
elements: capital growth and income. Certain kinds of assets, such as shares and property, are
subject to changes in market value, leading to capital gains and capital losses.
Other assets, like cash, only earn income. If you deposit R1 000 in a savings account, the
“capital” (the R1 000) is fixed, and you earn interest. But if you buy a flat and rent it out, you earn
income (rentals), and at the same time the value of the property may rise (a capital gain).
When it comes to unit trusts, capital growth refers to an increase in the price of units which
occurs as the values of underlying investments rise. (Of course, these can also go down, which
could lead to capital losses.)
The income from unit trusts comes from two main sources: dividends and interest. Dividends
are paid by shares, and interest is earned on the cash held in the portfolio. (Although some fund
managers aim to be fully invested, the daily creation and redemption of units within a unit trust
means the fund must always have some cash on hand.)

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