A unit trust, or mutual fund, is a unitised portfolio of investments that is managed by a fund manager according to a pre-specified mandate that spells out the objectives of the portfolio. The industry has been successful abroad and has gained popularity as an investment vehicle in SA.

A unit trust fund is called an ‘open-ended’ investment fund. This means that more units are created every time people invest money in a unit trust. The value of the unit is determined by the underlying value of all the assets of the particular fund, divided by the number of unit trust holders. The total value of the pool of shares and other investments held by the unit trust fund is calculated every day. The value is determined by the level of the share prices, or the value of the other investments held by the fund. The total value of all the assets held by the fund is then divided by the number of units owned by investors.

Minimum lump sum amounts for unit trust are low, although they can be slightly higher if going through some of the linked-product providers. Unit trusts also offer attractive monthly investment options. There are as many levels of volatility risk to unit trusts as there are types of unit trust. Money-market unit trusts show very little volatility, whereas specialised equity funds show a high degree. Even then, due to their spread over a basket of shares, equity fund unit trusts generally show less volatility than investing in a single share on the JSE. Unit trusts also do not offer any level of guarantee.

A wide variety of unit trust funds are available in SA and there are increasingly varied ways of purchasing them. In their simplest form, units in a unit trust can be purchased directly from the unit trust management company (Manco). Unit trusts are broadly categorised according to their investment mandates. In addition to purchasing unit trusts directly from the management company, there are now several alternative routes into unit trusts, such as those offered by the linked-product industry.

Linked-product Industry 

The linked-product industry is fast becoming the preferred route into unit trusts and already accounts for over 45% of new investment inflows in South Africa. In this arrangement, the linked product provider (LPP) acts as a central administrator of unit trust portfolios. Instead of an investor holding unit trusts with several different management companies, they purchase all their unit trusts through the LPP who has contracts with the management companies. The LPP channels the funds through to the management companies, which then invest the money in underlying unit trusts. The LPP therefore acts only in an administrative capacity and does not have any bearing on the underlying unit trust performance. The advantage of choosing an LPP is that the LPPs have structured a wide range of products, such as retirement annuities, pension and provident funds, life annuities and income plans, through which unit trust funds can be purchased. Unit trusts can therefore serve as the underlying investment portfolio for all sorts of voluntary and compulsory savings schemes. LPPs act almost as wholesalers of unit trusts and can therefore switch the investor from a fund of one management company to another for a very low switching fee.

Fund of Funds 

A new entrant into the unit trust industry is the Fund of Funds. This product is a fully registered unit trust in its own right, but unlike the ‘standard’ unit trust which invests in shares, bonds or money market instruments, this unit trust invests in a collection of other unit trusts.

Multi-Manager Funds 

The traditional unit trust usually has one manager who makes all the investments in that unit trust. The manager is responsible for the investment in money-market instruments, bonds and gilts, and all types of equities. The manager therefore needs to be somewhat of an all-rounder. In reality, however, some managers have a flair for niche investment areas, such as bonds, small companies, or IT companies. Instead of having one manager to manage the entire portfolio, multi-manager unit trusts employ bond specialists to manage the bond component, small companies specialists to manage the small companies component, and IT specialists to manage IT.

Wrap Funds 

Another variant within the unit trust sphere is the wrap fund. This arrangement has grown as an extension to products from LPPs. Many independent brokerages manage large numbers of LPP portfolios on behalf of their clients. Running too many individual portfolios becomes administratively inefficient and brokers often consolidate all of these individual portfolios into four or five combined (wrapped) portfolios according to different risk profiles. These managed portfolios are known as wrap funds. The advent of capital gains tax (CGT) on 1 October 2001 has threatened the existence of many of these wrap funds. Wrap funds are not regulated entities, so they become liable for capital gains tax every time they sell out of an underlying unit trust and realise a capital gain.