Page 72 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 3

In summary:
Income Accrual Class R charges apply to funds in existence before June
1998, and to unitholders invested prior to 1 April 2000.
Income accrual is defined in
CISCA as any dividends or The charges apply to both lump sums and debit orders.
interest (or any other income) In other words, a CIS manager cannot increase either
received by the trustee, custodian or initial charges or annual fees for an existing debit order
manager on behalf of investors in a client established before 1 April 2000.
portfolio and for distribution to investors.
On reinvestment of dividends from a lump sum
investment made prior to 1 April 2000, the fund is also
obliged to stick to the old charges (ie, Class R charges).
Quartile Class A charges are applicable to all new investments into
funds with Class A charges. Not all funds necessarily have
Technically, a quartile is the
mid-point of either the top or both Class A and Class R fees (some have stuck with their
bottom half of a data set (the old fees).
median is the mid-point data value). Class B and C units are based on fee structures which
A “top quartile” fund is therefore a fund apply to institutions or other “wholesale” clients. CIS
which has beaten at least 75% of other managers are sometimes reluctant to publish these fee
funds. A “bottom quartile” portfolio has structures.
been beaten by at least 75% of other
funds. ETF Unit Classes
Unlike other collective investments, an ETF can only
have one unit class (separate unit classes would require separate listings on the stock exchange).
Where a manager offers reduced fees for lump sum investments above a certain threshold, these
management fee differences are dealt with as rebates (ie, a portion of the fixed annual management
fee deducted inside the fund is returned to investors who meet the criteria for lower fees).
Income Declaration
Income is earned by a portfolio from two main sources: dividend payments from equities, and
interest earned from cash and fixed-interest securities. Such income earned is for the benefit of the
investors in the portfolio.
Under the Unit Trusts Control Act (UTCA), management companies were obliged to account
separately for income and, after recovery of their own charges (which could only be deducted from
income), to distribute the income to unitholders.
Most unit trusts have continued with this practice. Because the SA tax system treats income
from interest and dividends differently, management companies provide investors with a
statement showing the split between interest and dividends on any particular distribution.
Under CISCA, a unit trust can elect not to make distributions – provided this is clearly spelled
out to investors and incorporated into the trust deed. (A fund already making distributions would
have to get such a change approved and give unitholders plenty of notice.) A fund structured in this
way simply absorbs income received into the portfolio, using the proceeds to buy more assets. This
type of fund, known as a “roll-up fund”, is fairly common overseas, and more of these will be seen
in South Africa now that they are permitted under CISCA.

Total vs Annual Returns
The total return of a fund (sometimes also called the cumulative or absolute return) is the
total value of the investment at the end of a defined period. Annual returns, by contrast,
express the investment performance as an average annual rate of return.
The difference is important. Using a total return figure, a fund might advertise a return of 30% over
three years (ie, meaning the fund grew from R10 000 to R13 000 over three years). The equivalent
annual compound return is only 9.1% per annum. “Growth of over 50% in just five years” looks good
on a brochure, but a total return of 50% over five years is less than 8.5% per annum.
This handbook prefers annual compound returns because they make it easier to compare
different periods. Overseas this is sometimes referred to as CAGR (compound annual growth rate).

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