This information has been edited by Prof. Hugo Lambrechts of the Unitversity of Pretoria, a widely respected expert on Unit Trusts.
How to use this Information...
Frequently Asked Questions...
Unit Trust Information Topics...
A unit trust is a simple, effective way of accumulating capital over time. Any person who wants to build a balanced and diversified portfolio for whatever purpose can invest in a unit trust. A unit trust allows a large number of people to pool their savings for investment in the stock market, the capital and money markets. By so doing they are able to achieve a spread of investments and to reduce risk which would be more difficult to achieve as individuals with small amounts of money available for investment.
As a unitholder, your money, which can be as little as R50 a month, is invested on your behalf by the trust's portfolio managers. This means that for a relatively low cost, you obtain a share in a portfolio of investments in leading listed companies -a portfolio that is managed by the top portfolio managers in the country.
Unit trusts have proved to be an excellent investment over the medium- to long term and have outperformed inflation substantially, achieving excellent returns for investors. Risk is spread across a number of different securities and when you decide to sell your units you are able to do so at ruling prices, without having to compete against other sellers.
As an investor, you may be aware of the excellent potential returns your capital can earn on the stock exchange. But you are also aware of the risks involved when you invest in shares - especially if one doesn't have the necessary expertise and time available to monitor your investments on a regular basis.
The solution may be a unit trust because it gives you direct access to the potential good performance of the Johannesburg Stock Exchange - and the capital appreciation that a long-term investment in shares can provide.
The following are answers to some of the questions people ask most frequently - and that you are most likely to ask about unit trusts:
Each unit trust is managed by a unit trust management company which is backed by a financial institution of substance. The management company is responsible for the investment function and the day-to-day administration of the unit trust. Within each management company, each unit trust is managed by a team of portfolio managers who, on a daily basis, make investment decisions for the fund. It is the responsibility of these portfolio managers to analyse the trends in the economy as they impact on the financial markets and decide which counters to buy or sell in line with the trust's stated investment policy.
You can liaise with the management company on a regular basis if you have any queries or other needs.
A unit trust is the ideal opportunity to acquire capital profit with a well diversified investment portfolio put together and managed by professional money managers. This afford you a share in our country's growth.
The investment portfolio is divided into equal units. Each unit represents a direct proportional share in each and every asset of the portfolio. The value of the units is subject to the fluctuations in the market value of the underlying securities in which the unit trust is invested.
You purchase units in the unit trust of your choice. The number of units you receive depends on the amount of money you invest and the ruling unit price. The unit prices are calculated daily at the ruling market values of the different securities in the portfolio and are published in the financial sections of all the major newspapers the following day.
A unit trust must, however, not be used as a short-term investment - a bank savings account or money market investment is much more suitable for this purpose.
Unit trust investors are well protected.
In the first place each unit trust is managed by a professional portfolio manager. The portfolio manager uses the research facilities of his or her in-house investment research division or those provided by JSE stockbrokers.
Each trust also has a trustee, approved by the Registrar of Unit Trusts, with no shareholder relationship with the management company. The unit trust fund is "constituted by way of a trust deed under the formal supervision of the Executive Officer of the Financial Services Board." Every unit trust is legally obliged to have a separate institution as trustee to act as independent arbiter. The trustee acts as a safeguard for the fund's assets against potential mismanagement by the management company. The trustee therefore ensures that the assets of the trust remain the property of the unitholders, i.e. the trustee acts as the guardian of the assets on behalf of the beneficiaries - the unitholders.
The trust deed is the contract between the trustee and the management company. The trustee ensures that daily transactions are conducted in accordance with the trust deed and that the investment policy is adhered to. If the trustee has any suspicion that the manager is not acting in the unitholders' interests, he has the power to replace him. The unit trust industry in South Africa has gained a very clean reputation in this respect over the last quarter of a century.
Unit trusts are taxed as companies, which means they are exempt from tax on dividends, while no tax is payable on capital gains from the sale of investments. Interest received is only taxable to the extent that such income is not distributed to unitholders in the year of receipt, but since a unit trust is obliged by law to declare all dividend and interest income net of expenses to unitholders, it is effectively a non-taxpaying entity. Of course, tax is paid by the listed companies whose shares are owned by the unit trust, but no direct tax is levied on the trust itself.
The tax element of the income distribution in the hands of the unitholder depends entirely on how that income was derived by the unit trust -
The dividend and interest income mix depends on the portfolio content.
A management company assumes responsibility for the management and control of the scheme and issues unit certificates. The management company must be registered with the executive officer of the Financial Services Board (FSB) before it may commence operations. Although a management company may have more than one unit portfolio under its control, each portfolio must be approved by the FSB.
Unit trusts may only invest in securities quoted on the Johannesburg Stock Exchange or in derivative instruments in the manner and on the conditions prescribed by the Registrar. Units may only be sold for cash and shares may not be sold "short" by the unit trust (i.e. the fund may not sell shares it does not possess). At least quarterly, every management company has to submit a complete listing of all securities held in each portfolio, to the executive officer of the FSB. The executive officer checks these returns in order to ensure that the activities of the individual unit trust schemes adhere to legal requirements and its relevant investment policy.
The management company responsible for the investment and administration of the unit trust must be a public company with issued share capital and non-distributable reserves of at least R2 million, and with an FSB-approved trust deed with a registered trustee. The unit trust assets must be held on behalf of the unitholders by a trustee registered by the executive officer. The trustee must maintain a minimum level of capital and unimpaired reserves of no less than R1 million. The management company is obliged to repurchase all units offered to it.
All management companies must hold an investment of at least 10% of the total amount of units in each unit portfolio, but this can be limited to R1 million, subject to the approval of the executive officer of the FSB. Net income from dividends and interest must be fully distributed among unitholders. The portion of the unit price (at inception and excluding compulsory charges) representing the management company's recoverable costs may not be greater than 5% of the unit selling price. However, most management companies have a sliding scale with the initial charge decreasing as the size of the investment amount increases.
Previously, no more than 5% of the assets of a unit portfolio could be invested in any one security. Also, no more than 5% of any one concern's issued security could be held. A minimum of 95% of the securities held by the portfolio had to be listed securities. The Unit Trusts Advisory Committee, which was created in August 1991 to advise on all matters pertaining to the industry and to make recommendations to the Minister of Finance and to the Registrar, recommended during its first meeting early in October 1991 that the existing restriction of 5% be raised to 10% in the case of securities in a concern with a market capitalization of more than R2 billion.
The maximum percentage recoverable by the management company in respect of service charges is specified in the trust deed and represents a uniform tariff of a three-quarter per cent of the average monthly market value of the portfolio (if a portfolio has an average market value of R10 million over a year, the management company will deduct R75 000 (as service charges) from the income generated by the portfolio). The maximum annual service charge will increase to one percent on April 1, 1996. In addition, the maximum initial charge is stipulated in the Act as 5%. This is utilised by the management company as compensation for its marketing expenses. The management company may deduct fees only from the accrued income in the portfolio and not from capital invested.
The unit trust industry is represented by the Association of Unit Trusts (established in 1967). This association promotes the business of the industry and maintains all statistical data. All the existing 20 management companies are members of the Association and provide it with certain information on a quarterly basis.
The approval of advertisements has been delegated to the industry as part of self-regulation. Advertisements must comply with the Code of Advertising which is monitored by the Advertising Standard Authority (ASA) of South Africa. Advertisements must also comply with the general Code of Advertising of the aforementioned Authority. The Association of Unit Trusts is a member of ASA.
In today's uncertain world, it is important to have a nest egg, a pool of savings that will grow over time and will not be eroded by inflation. Equities, or shares listed on the JSE, have proved over time to be just such an investment. Most investment advisers will recommend a spread of shares in a balanced portfolio rather than advising you to invest in one share only, which can be extremely risky. With some blue chip shares having become very expensive, creating a balanced portfolio has become very difficult for most individual investors.
Unit trust investment is also a very convenient and a relatively low cost method of investing in the share and bond markets. You can make your investment either by way of a lump sum or on a monthly debit order and the management company takes care of every detail. You don't have to worry, for instance, about what you should do in the case of a takeover bid or if a company announces a rights issue. By buying into a unit trust you obtain that balanced spread of risk for as little as R50 a month and you get daily, professional management of your portfolio.
There are three main categories of unit trusts, designed to appeal to different types of investors, namely:
For most investors a general equity trust should be their first step in building a long-term portfolio. General equity trusts invest in a balanced and diversified portfolio of shares listed on the Johannesburg Stock Exchange. These trusts are able to achieve a spread of shares which is impossible for most smaller investors to accumulate. They also have the advantage that you can invest as little as R50 to R100 per month and tailor your investment plan to suit your own financial needs. General equity trusts cater for investors seeking a portfolio which is diversified across the broad economy and which invests in various sectors of the JSE, from mining and resources to industrials. As with all unit trusts, general equity trusts must hold a minimum of 5% of the portfolio in cash. The aim of the general equity trusts is to offer unitholders sustained long-term growth in both income and capital values. By far the largest number of trusts and the largest proportion of the industry's assets are invested in general equity trusts.
Income/gilt trusts seek an above average level of current income plus an element of capital growth for their unitholders. This is achieved by investing in fixed interest securities such as gilts, semi-gilts, debentures and fixed deposits. These securities are either issued by major corporations or by government and semi-government institutions such as Eskom, Telkom and Transnet. Income unit trusts are the ideal investment for those individual investors who are risk averse, and who seek to secure their capital and earn a high and regular return on their investment. Income/gilt funds may also appeal to investors who wish to spread their portfolio beyond equities or who wish to maintain their investment in a unit trust but feel that the current level of share prices are too high. Income trusts also enable investors to earn competitive returns on a temporary basis, for example, when the unitholder wants to temporarily reduce exposure to the equity market.
These trusts afford investors, who usually already have a general equity trust investment, the opportunity of focusing on selected sectors of the JSE. These funds concentrate their investments in one particular area or sector of the share market and invest exclusively in the shares of companies involved in that sector. Specialist equity trusts allow the investor to select his/her investment preference and participate in the growth of a particular sector of the market. Specialist equity trusts include: · Industrial funds: which invest primarily in the industrial shares listed on the JSE. · Mining and resources funds: funds which focus exclusively on these sectors of the JSE. · Gold funds: funds which mainly invest in gold shares. · Other specialist equity funds: a category which caters for specialist equity funds which do not fall into any of the above categories and can include for example trusts which have capital growth as their main objective or the so-called balanced/managed funds.
First time investors in unit trusts are advised to select a general equity trust. These trusts are the most popular (72% of the industry's assets was invested in general equity funds at the end of December 1995) and invest in a balanced portfolio of blue chip companies with their objective being a combination of long-term capital appreciation in the value of the portfolio as well as income growth. Investors should analyse their personal needs carefully and select the fund that best suits their investment profile - for example, an investor seeking security and income would be best advised to select either a general equity trust or an income fund, and not a specialist equity trust (for example, a gold fund) where the risks may be higher.
Each management company clearly outlines the investment focus of its fund and publishes its detailed portfolio on a quarterly basis. If you are interested to invest in unit trusts, you should obtain copies of the quarterly report from the individual management companies and study them in consultation with your financial adviser.
Most management companies require a minimum investment of R100 as a lump sum or R50 per month as a minimum monthly investment. There is no maximum investment. Unit trusts are very flexible investments and you can add to your investment at any time. If you wish to temporarily suspend or stop your monthly debit order, you can do so without penalty. If your investment amount that you have available is relatively large and you are uncertain or concerned about the current level of the share market, you can elect to invest your capital over a phased period of say six or 12 months. Alternatively, you may prefer to invest your funds immediately in an income fund and to transfer to an equity fund as and when you believe the share market offers sound value.
The price of each unit in a unit trust reflects the total market value of the trust's investments divided by the number of units that are in issue. The price of units therefore fluctuates daily (up or down) along with the rises and falls in the prices of the underlying securities in the portfolio. If the share market rises, the value of each unit that you own in an equity trust rises and, if the value of bonds or other fixed interest securities rises, the value of your income fund will rise. The reverse, however, applies when values decline.
Unit trusts can also be called "open-ended" trusts because the number of units in a trust can be increased by creating new units, or decreased by cancelling units as supply or demand varies. The prices of unit trusts are published daily in all the major newspapers.
There are two prices - the selling price and the repurchase price.
There is an initial fee - the difference between the price which you pay per unit and the price at which the management company will buy the units back from you on the same day. This difference comprises the following components:
A service charge of 1/16 of one percent, calculated on the market value of the portfolio at the end of every month, is retained from the income earned on the assets in the unit trust. This income is divided among all the investors in the unit trust every six months (and every three months in the case of the most income/gilt funds). GuardBank Capital Focus Fund only declares dividends once a year. The maximum annual service charge will increase to one percent from April 1, 1996.
Like any investment, the value of units fluctuates in line with movements in the financial markets. You should always bear in mind that prices may decline and the value of your investment may reduce accordingly. This is why it is always recommended that you invest only those funds which are not needed for everyday living and can be allowed to grow over a relatively long period of time.
An investment in a unit trust should only be made after providing for basic everyday household expenses, adequate life assurance and an emergency cash fund. Because equity unit trusts invest in the share market which can be very volatile, it is almost impossible to determine precisely the best time to invest. Even the experts find it difficult. The unit trust industry offers a powerful method called rand cost averaging for eliminating the timing risk. With rand cost averaging you invest a fixed amount on a regular monthly basis - as a result you accumulate more units when prices are low and less when they are high and so end up with a lower average cost per unit than if a set number of units is purchased at set intervals.
In effect the average cost per unit is lower than the average price paid. This has proved to be a most profitable and efficient method of investing in unit trusts. However, one thing is important: You should be in a position to leave your unit trust investment untouched for a minimum of five years or longer. If you are going to need your money within the short-term, you would probably be best advised to put your money in the bank.
Each has its advantages. With a lump sum, you can pick your own time when prices are in your favour - in order to obtain the best possible growth over both the short- and the long-term. This requires good timing as well as expertise (and a good deal of luck).
On the other hand, a regular investment of a fixed amount each month gives you the benefit of rand cost averaging. This means that if you invest over a period of time, the average cost per unit will be less than the average of the prices which you bought over the same period. In this way you maximise your prospects of capital growth and minimise the effects of bad timing.
Yes, you can increase or decrease your monthly payments as it suits you.
The growth in a unit trust investment consists of: · long-term increases in the market value of the units. · income earned on the underlying assets (shares, bonds and cash) in the portfolio, and · the purchase of additional units by reinvesting the dividend income.
Yes, unit trusts are probably the industry within the financial services sector with the most stringent rules and regulations:
Unit trust investment is highly flexible. Many of the management companies operate more than one trust and allow you to switch from one fund to another within their family of funds at a reduced or no initial charge. If you elect to switch your investment from one management company to another you simply give written notice that you wish to sell your units and then buy units in the trust of your choice.
Switching between funds in the same family does not have a high cost attached to it, but switching between different management companies will involve your paying the initial and compulsory charges again and this can be a very costly exercise if done frequently.
Yes, by ceding or pledging of your unit certificate. The company to whom you cede or pledge your unit certificate must send a copy of the session to the management company involved so that it can be recorded.
Yes. Wholly or partly, as you wish. In this way you are free from the responsibility of supervision and management of an individual share portfolio.
Yes, the following:
As with any other asset, an investment in a unit trust may be bequeathed. It has the added advantage that it can be divided on an absolutely equitable basis amongst the beneficiaries in the will.
Yes, you are free to invest in anyone else's name, for example in your spouse's name or on behalf of your children or grandchildren.
Please note that in such a case ownership resorts back to the registered unitholder(s).
Yes, normally twice a year, and four times annually in the case of most income/gilt funds. This income is derived from the investments in shares and / or bonds and cash which the relevant unit trust has in its portfolio. The unit trust earns dividends on the shares in the portfolio, and interest on its investments in bonds and cash. The income received in this way is divided among the number of units in issue on the date of declaration and expressed as an income in cents per unit (it can also be expressed as a percentage dividend yield). Dividend income and interest income are taxed differently. The income distribution notice you receive will clearly shows which portion of your income is derived from dividends and which from interest. Payment or reinvestment of income is generally made about two to four weeks after the declaration date, although certain management companies reinvest on the first working day of the new quarter, if a dividend was declared at the end of the previous quarter.
Definitely, provided you do not need it to supplement your pension, for example. It is easy to let the income earned on your unit trust continue working for you in the same trust. Simply leave your income in the unit trust and the management company will automatically purchase additional units for you. In this way you increase your unit holding, as well as your base for additional capital and income growth in the long-term. You could even consider investing your investment income from other sources in the unit trust of our choice.
Unit trust management companies are obliged by law to buy back units from unitholders at the ruling repurchase price. A unitholder simply has to give the management company written notice that he or she wants to sell his/her units. The management company then buys back the units at the ruling repurchase price and undertakes to pay the unitholder his/her money within 14 days. This means that unit trust investments are very liquid and you will have your cash at short notice.
No, you have already paid an upfront amount approximately equal to 7½% of the value of your initial investment and will not pay again should you decide to redeem your units.
Because no contract binds you to a specific period , you can invest for as long as you wish.
Yes, just like ordinary shares.
Frequently asked questions(faq's) are grouped under the following headings, click on one of these headings for the associated list of faq's:
Your bank or most assurance companies will have more information about unit trusts, as will your stockbroker, accountant, lawyer or financial adviser.
Ask them to provide you with the quarterly reports or brochures from the various management companies and assist you with a decision as to which unit trust will best suit your specific needs.
Information on investing in Unit Trusts from the Management
Companies may be found by clicking on of the links below:
Mr Colin Woodin is the executive director of the AUT.