Page 77 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Costs and Pricing

Unit trust funds, as part of their mandates, define benchmarks that they consider appropriate
reference points for fund managers and investors. Suitable benchmarks are usually based on
securities or indicators which coincide with the investable universe for the fund. A large cap fund, for
example, might specify the JSE Alsi40 index as a benchmark, and a money market fund the STeFI.
Where a fund manager creates a benchmark consisting of several elements combined using a
constant formula (eg, 75% JSE All Share index, 15% All Bond index, 10% MSCI World index)
this is known as a composite benchmark.
Investors and financial advisors may, from time to time, use benchmarks other than those
defined by each fund. In a period of poor market returns, for example, it might be useful to
compare performance across a range of funds by using the inflation rate as a common benchmark
(ie, to see which have given a real return). The appropriateness of benchmarks must, however,
always be considered. As a rule, for example, it would be inappropriate to use a stock market index
as a benchmark for a money market fund.
Benchmarks are most commonly used to asses relative performance. They can also be used,
however, to compare other measures, such as volatility, holdings or fees. The average annual
management fee for a sector, for example, could be used as the benchmark against which the fees
of individual funds are judged.
Reinvestment of Income
Income from CISs is usually declared and paid out quarterly or twice yearly. The yield and the
frequency of income payment obviously has an impact on investment performance – particularly,
due to compounding, over longer periods.
Two methods are used in the industry for dealing with income declarations for the purpose of
calculating performance statistics.
The first method simply reinvests the income on the ex div date (ie, the day after the
declaration date) using the published price on the ex div date.
The second method reinvests the income on the payment date using the reinvestment price
supplied by the CIS manager. There can be as much as four weeks difference between the
declaration and payment, but on average it differs by a few days.
In Profile’s Unit Trusts & Collective Investments we calculate returns based on the payment date
using the reinvestment price obtained from the CIS manager. This is the more accurate method.
Note that all performance statistics reflect before-tax rates of return. For the calculation of
performance figures, reinvestment of income distributions ignores dividends withholding tax
(DWT) and any other tax that may be payable by an investor (eg, tax on interest). This is because
applying gross distributions is the cleanest way of creating comparable figures across different
funds and management companies – if net figures were used disputes might arise about applicable
deduction levels. Some foreign investors, for example, enjoy a lower rate of DWT, and companies
and special trusts are exempt from DWT – on a net reinvestment basis these exceptions might give
rise to arguments in favour of average DWT actually applied or other complex calculations.
DWT creates a disparity between reported performance figures and the actual returns enjoyed
by individual investors, most of whom are subject to DWT at 20%. Although distributions are
treated as free from deductions for purposes of reinvestment of income when calculating
performance figures, the actual reinvestment of a distribution for an investor occurs net of DWT
(ie, after the fund manager has deducted the withholding tax).
Tricks and Tips
When looking at published performance figures – and especially when comparing performance
stats from different sources (eg, fund fact sheets from the fund managers and independent figures
in a newspaper) and/or offshore funds – always double check to see how each of the following
factors has been treated.
Have costs been taken into account? If so, exactly which costs are excluded and which are
included in the calculation? Most performance figures are net of annual management fees
but don’t take into account initial charges, broker commissions, trailer fees and exit fees.

75
Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts