Page 54 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 2

The managers and their agents must disclose:
All the charges that may be levied by the manager, the method of calculation, and the amount (as
a percent or value) of the charges.
When the charges will be levied.
Exactly how the manager will repurchase participatory interests.
Particulars of the historical yield, calculated as prescribed by the deed, for the last 12 months, and
a statement of any facts that may influence future yields.
Details of any profits that were distributed during the previous financial year, expressed as a
percentage of the aggregate market value of all assets held on behalf of investors in that portfolio.
Affordability
Investors can choose to invest in unit trust funds in two ways, monthly by debit order or with a
lump sum. A dozen funds allow minimum lump sum contributions of R500, but most funds
stipulate minimums of R1000 or more (excluding the now defunct Fundisa funds). In the case of
monthly debit orders, a handful of managers allow minimum contributions of R100 per month,
but the majority (about two-thirds of retail funds) are in the R200 to R500 per month range.
Minimum lump sums for retail hedge funds start at R50 000. For qualified investor hedge
funds, minimum investments amounts are R1m.
Tax Effectiveness
Until February 2000, it had been the practice of the SA tax authorities not to tax capital gains
on equity-based unit trusts. In the March 2000 budget, however, Minister of Finance Trevor
Manuel announced his intention to tax capital gains on a wide range of assets, including
equity-based investments, with effect from 1 April 2001. (Implementation of Capital Gains Tax
(CGT) was later delayed until October 2001.)
After much lobbying from the unit trust industry, the tax authorities agreed that income and
profits on collective investments must be taxed in the hands of the individual investor, not the CIS
itself. (This contrasts with the decision taken by the same tax authorities when it comes to
investment trusts, which are liable for CGT on their investment portfolios.) Although this reduces
the tax effectiveness of unit trusts, they are not at a disadvantage compared to direct investment in
the share market, property, or other asset classes. Under SA’s CGT legislation, each individual is
taxed on 40% of the realised capital gain at his or her marginal rate of tax. This means that, of a
realised profit of R100, R40 must be added to income for the year of assessment. At a marginal rate
of 45%, the investor effectively pays 18% CGT on realised profits (45% of the 40% of the capital
gain added to income). Obviously the effective rate is less than 18% if the marginal tax rate of the
individual is less than 45% (eg, where a medium-income individuals pays an effective tax rate of
30% the effective CGT rate is 12%).
Income from interest-bearing funds, as well as the interest portion of distributions from equity
funds, are fully taxable in the hands of investors subject to the ruling interest exemption to natural
persons. The dividend portion of distributions is subject to dividends withholding tax (DWT)
unless the investor is an exempt entity (DWT is deducted by the fund manager before the dividend
is paid out or reinvested). Unit trust management companies provide statements to investors after
February each year to show the split of dividends and interest received for tax purposes.
Professional Management
Not many investors in South Africa have the time, resources and aptitude necessary to monitor
their own portfolios. Investors in collective investment schemes therefore entrust this task to
professional fund managers employed by management companies, who generally charge between
0.4% and 1.8% of the assets under management, per annum, for their management services. Annual
fees tend to be less for income, gilt and index funds, and relatively more for equity-based funds.
Multi-manager funds tend to be the most expensive. Some CISs charge performance-based fees – the
fees levied are dependent on the performance of the fund relative to specified benchmarks.

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