Investments: Unit Trusts

A unit trust is a medium to long term investment which enables you to invest in markets that might otherwise be difficult to access. When investing into a unit trust, your money is pooled with that of other individual investors giving a spread of professionally managed money market, bond or equity instruments.

Most unit trusts are open ended trusts where there is no limit to investors participating in the fund, and the number of units fluctuate only upon the supply and demand requirements of investors. As a unit trust investor you purchase units at the time of investment and these represent your overall share of the Unit Trust fund. The price of the units is valued daily and is dependent on the value of the underlying investments in the pool.

Unit Trusts are an ideal medium to long term savings vehicle.

Requirements

Unit trust management companies are required to operate their investments with certain requirements or mandates laid down by the Financial Services Board and Association for Savings and Investment South Africa (ASISA).

These include the following:

Overview of changes to the ASISA fund classification structure – Effective 1 January 2013
Classification to follow “Where” and “What “ principle, i.e. where is it invested and in what. All percentages refer to net (effective) exposure to the stated asset class. Each Tier 1 category will have the full Tier 2 available. New Tier 3 sub-categories will be created if there are at least five funds with a similar investment universe.

New Tier 1 – “Where” Principle
Tier 1 indicates the geographic exposure of the fund.

New Tier 2 – “What” Principle
Tier 2 indicates the main asset class in which the fund will be invested.

New Tier 3– “Main Investment Focus” Principle

Pricing

Two prices are quoted in the daily newspapers for each unit trust, namely a buy price and a sell price. The sell price, or repurchase price is the price at which the fund manager will repurchase your units at, whilst the buy price (the higher of the 2 prices) is the price the investor would buy units at.

The difference between the buy and sell price is known as the initial charge. These include broker commission, fund charges, marketable securities tax and VAT.

A unit trusts' price is fixed on a daily basis.

Most companies use future or forward pricing to calculate the day's price of their units. This means that all sales, repurchases and creations of new units are processed at the end of the day at the "close of business" price, from the previous day.

Fund classes

Unit trusts will now be issued in several classes from the same unit trust fund. Each class of fund will hold the same stocks, share the same assets, and will be handled by the same fund manager.

• Funds launched before deregulation (June 1998) will be called "Class R" funds. This will include all existing unit holders prior to deregulation.
• New investors will now invest in "Class A shares" with higher annual service fees and could also include performance-related fees and back end fees.
• Institutional investors such as Pension / Provident funds will be classed as "Class B" funds. As the institution investor requires less service they will be charged lower fees.
Service fees are deducted from dividends and interest before they are distributed to investors.

How much can I invest?

Whether you invest by a monthly debit order or by a single lump sum is a personal choice. Monthly debit orders offer the benefits of rand cost averaging. This means that peaks and valleys in the market tend to be smoothed out through regular contributions.

Minimum monthly investments are generally R300 per month, while lump sums are R5 000 per investment. These amounts can be varied at any time.

Which unit trust should I choose?

A good financial advisor is imperative to guide you through the necessary analysis before you make your choice.

Excellent historic performance on a fund is no guarantee of future return, and the insight a good advisor can give you into an Asset Management company in general and a fund manager in particular will be invaluable in assisting you with your choice.

It is always important to bear in mind there are no capital guarantees on unit trusts.

Total Expense Ratios (TER)

What is a TER

The Total Expense Ratio or TER of a portfolio is:
• a measure of the fund’s assets that have been sacrificed as payment for services rendered in the management of the fund,
• expressed as a percentage of the daily average value of the portfolio,
• calculated over a period of usually a financial year.

Why disclose TERs?
• The Collective Investment Scheme (CIS) industry supports a principle of disclosure and transparency to its investors. TERs have been implemented in the interest of investors, as these should assist investors and their advisors to understand the disclosure better.
• TERs enable investors to evaluate their portfolios by quantifying the cost incurred in the management of the fund in a single number so that the impact of these costs on returns is clearer.
• Costs matter. Investors should understand the costs they are paying for and the value they are getting for their money. The TER methodology was selected as the concept of expenses is well known and understood by all consumers.
• There is international precedent for using TERs to measure expenses elsewhere in the world.
Expenses included in the TER calculation

Cost incurred in the prudent operation of a fund are included. The costs are deducted from the fund’s assets.
• Management fees (including performance fees)
• Fixed operating costs:
• Custody and Trustee fees
• Audit fees
• Bank charges, other than those charged by an investor’s bank
• Value Added Taxes
• Liquidity costs:
• Net negative interest charges (this is applicable in the unlikely event of a fund owing interest to a bank as a result of temporary liquidity pressure)
• For investments in other funds:
• Weighted portion of the underlying portfolio’s TER (for funds of funds)
• Upfront fees
• Exit fees or reduction of redemption
• Where income is earned by the providers of scrip lending services and if this income is not passed back to the portfolio, such an amount that is retained by the provider must be included.
Investor expenses not included in a TER

Costs that are incurred directly by the investor and not the fund itself are not included, such as:
• Costs of entry to an investment, i.e. initial fees
• Initial and ongoing cost for financial advice – if applicable.
• Other costs incurred directly by the investor, because of the investment, e.g. bank charges.
• Exit costs.
• Costs that are related to specific products, where these products invest in collective investment schemes, such as some life and LISP products. An example of this would be the cost of a Retirement Annuity which invests in collective investment schemes.
The above-mentioned expenses are not included in the TER calculation as:
• They do not form part of the actual fund investment.
• They should be disclosed separately to investors, e.g. by the life company, LISP, bank and/or the intermediary.
• They are often of a once off nature.
Brokerage and transaction costs

Brokerage and expenses relating to the settlement of transactions and taxes incurred on these items, i.e. Vat on brokerage, UST and stamp duty, do not need to be included in the TER calculation.

This decision was taken:
• To align the Association for Savings and Investment South Africa (ASISA) TER to other expense ratios used elsewhere in the world.
• To enable more accurate comparisons of TERs of local funds to TERs of international funds.
• Transaction costs will be incurred regardless of the capacity in which such a purchase is made, e.g. purchasing equity in a private capacity or for an underlying asset in a portfolio.

Performance fees
• Performance fees must be included in the TER calculation.
• Performance fees must also be disclosed separately. This is to enable investors to distinguish between costs that may be charged to a portfolio regardless of its performance and a performance fee that may vary significantly from one year to the next. The cost of the performance fee, in rand terms, will be disclosed as a percentage of the average net asset value of the portfolio.

TER vs. annual management fee
• An annual management fee (AMF) is the fee a CIS Manager charges for asset management and fund administration. It is expressed as a percentage of the portfolio’s assets under management.
• A TER, as previously stated, is comprised of the actual expenses paid out of a fund for the management of the fund and it includes the annual management fee.
• The TER will therefore be higher than the AMF.
• The costs included in the TER calculation are not new; they are disclosed in a portfolio’s financial statement for the relevant financial period.

Who will calculate the TER?
• The CIS Manager will calculate and publish a TER for each portfolio under its management on a quarterly basis.
• Each class of a portfolio will disclose its unique TER that will be comprised of costs that are specific to that fee class.

Where will TERs be disclosed?
• TERs will be available through the newspapers and magazines that carry fund performances and charges.
• With financial statement – interim or annual, audited or provisional
• In monthly, quarterly and annual reports
• In fund fact sheets
• In Internet publications
• With annual unit holder communications
• On the ASISA website with the fund prices
• The latest TER must be disclosed to an investor prior to making an investment. This TER disclosure must be in addition to the other disclosures required under CISCA and the FAIS Act, e.g. notifications of risk and cost.
A typical TER disclosure is:

TER: 2.65%
The Happy Equity Fund, A class has a Total Expense Ratio (TER) of 2.65%. For the period from 1 April 2007 to 31 March 2008, 2.65% of the average Net Asset Value of the portfolio was incurred as charges, levies and fees related to the management of the portfolio. A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The current TER cannot be regarded as an indication of future TERs.

Inclusive in the TER of 2.65%, a performance fee of 1.25% of the Net Asset Value of the class of portfolio was recovered.

Quarterly Review
• CIS Mangers will update TERs for all portfolios and classes at the end of each calendar quarter.
• The calculation will include all applicable costs for the previous rolling twelve-month period, to the end of the previous quarter.
• The new TER will be disclosed by the last day of the month in which the TER was reviewed.
A high TER vs. a low TER
• A high TER is not necessarily an indication of a bad investment choice.
• A high TER should not be viewed negatively if a fund outperforms other funds or adds additional value for the higher costs incurred.
• A high TER is also not necessarily an indication of superior performance.
• TERs are reported in a standardised manner, enabling investors to better compare the costs of their portfolios.
TERs use historical information
• As is the case when calculating fund performance, a TER is calculated using historical data.
• Past expenses are not always indicative of future costs as costs are influenced by external factors. It is therefore not possible to forecast future costs accurately – we do not know what the future holds but we can measure the past!
• However, the information used in the TER calculation is based on real costs, i.e. what was actually paid out of a fund; these are not projections that are based on assumptions.
Multi-layering of fees
• Investment in funds that have tiered structures, such as a fund of funds, are likely to have higher TERs than single funds, due to the multi-layering of fees inherent in these investment structures.
• FAIS prescribes that all disclosures must be made to investors.
• The TER of the top tier fund will not be revealing a new fee; it will simply quantify the already disclosed fees to investors in a more consumer friendly manner.
Small vs. Large funds
• In all likelihood, funds with lower assets under management will reflect a higher TER as their fixed costs per unit will result in higher TERs compared to that for funds that have larger assets under management. This is due to economies of scale.
• TERs for new funds:
• TERs do not have to be calculated for funds that have been in existence for less than six months.
• If a fund has been active for less than one year but more than six months, a CIS Manager may calculate a TER since inception.
When comparing TERs
• When comparing TERs it is imperative to ensure that one is comparing “apples with apples”. It is advisable to note that costs and TERs are just one factor to take into consideration when comparing funds and when making an investment decision. Consideration must also be given to:
• The sector the fund falls into – this relates to the types of fund one invests in, e.g. an equity fund invested into listed shares, or a fixed interest fund invested in bonds, money market investments and other interest bearing securities
• Fund objectives – all funds have mandated objectives that investment managers set out to achieve.
• The structure of the investment, i.e. a fund of funds or a single tiered fund.
• The anticipated net, risk-adjusted return of a fund, relative to an investor’s total investment portfolio.
• Costs – these include both the costs included in the TER calculation and those not included.
• Investment risk – investors should evaluate their tolerance for risk and then match this risk profile with a suitable investment.
• There may be a mismatch between the term of the investment and the TER calculation. TERs will be calculated for periods of full financial year and the time an investor has been invested in a fund, may not correspond to the TER measurement period.
The implications of disclosing TERs
• TERs will result in cost now being more understandable.
• TERs should facilitate investor education and their understanding of the investment.
• Investors will be better able to evaluate the total investment offering, including subjective and value added information.
It is important to note that TERs and therefore costs are not the only factor to consider when making investment decisions. It is important for investors to know what they are investing in and what they are paying for.

Issued by the ASISA

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CLASSIFICATION OF SOUTH AFRICAN REGULATED UNIT TRUSTS

1. CLASSIFICATION OF SOUTH AFRICAN REGULATED COLLECTIVE INVESTMENT PORTFOLIOS
(All percentages apply to net effective exposure and apply at all times. The benchmarks indicated are defaults and are not prescribed.)
The first tier of classification is as follows:

1.1 South African Portfolios: These are collective investment portfolios that invest at least 70% of their assets in South African investment markets. These collective investment portfolios may invest a maximum of 25% of their assets outside of South Africa plus an additional 5% of their assets in Africa excluding South Africa.

1.2 Worldwide Portfolios: These are collective investment portfolios that invest in both South African and foreign markets. There are no limits set for either domestic or foreign assets.

1.3 Global Portfolios: These are collective investment portfolios that invest at least 80% of their assets outside South Africa, with no more than 80% exposure to assets of a specific geographical region.

1.4 Regional Portfolios: These are collective investment portfolios that invest at least 80% of their assets outside South Africa, in a specific geographical region, including Africa, other than South Africa.
Please note that for the purposes of 5.1, 5.2, 5.3 and 5.4 “inward-listed equities” are deemed to be South African assets.
Each of these categories is sub-categorised into the second tier of classification, namely:
i. Equity portfolios;
ii. Multi Asset portfolios;
iii. Interest Bearing portfolios; and
iv Real Estate portfolios

The second tier of classification is further sub-categories in the following detailed sub-categories:

Equity Portfolios
o Equity – General portfolios
o Equity – Large cap portfolios
o Equity – Mid & Small cap portfolios
o Equity – Resource portfolios
o Equity – Financial portfolios
o Equity – Industrial portfolios
o Equity – Unclassified portfolios

Multi Asset Portfolios
o Multi Asset Flexible portfolios
o Multi Asset High Equity portfolios
o Multi Asset Medium Equity portfolios
o Multi Asset Low Equity portfolios
o Multi Asset Income portfolios

Interest Bearing Portfolios
o Interest Bearing – Variable Term portfolios
o Interest Bearing – Short Term portfolios
o Interest Bearing – Money Market portfolios

Real Estate Portfolios
o Real Estate – General portfolios

2. SECTOR DEFINITIONS:

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SOUTH AFRICAN PORTFOLIOS

2.1 Equity Portfolios:

These portfolios invest a minimum of 80% of the market value of the portfolios in equities and generally seek maximum capital appreciation as their primary goal.

2.1.1 Equity – General portfolios - These portfolios invest in selected shares across all industry groups as well as across the range of large, mid and smaller cap shares. While the managers of these portfolios may subscribe to different investment styles or approaches, their intent is to produce a risk/return profile that is comparable with the risk/return profile of the overall JSE equities market. The portfolios in this category offer medium to long-term capital growth as their primary investment objective.

SA Benchmark: FTSE/JSE All Share index (J203T)
2.1.2 Equity – Large cap portfolios – These portfolios invest at least 80% of the market value of the portfolios in large market capitalisation shares which have a market capitalisation greater than or equal to the company with the lowest market capitalisation in the FTSE/JSE Top 40 Index, or an appropriate foreign index published by an exchange. 100% of share purchases must be in this investable universe at time of purchase.

SA Benchmark: FTSE/JSE Top 40 index (J200T)
2.1.3 Equity – Mid & Small cap portfolios – These portfolios invest at least 80% of the market value of the portfolios in shares which have a market capitalisation smaller than the company with the lowest market capitalisation in the FTSE/JSE Top 40 Index, or an appropriate foreign index published by an exchange. 100% of share purchases must be in this investable universe at time of purchase. Due to both the nature and focus of these portfolios, they may be more volatile than portfolios that are diversified across the broader market.

SA Benchmark: FTSE/JSE Mid Cap index (J201T)
2.1.4 Equity - Resources portfolios – These portfolios invest at least 80% of the market value of the portfolios in shares listed in the FTSE/JSE Oil & Gas and Basic Materials industry groups or in a similar sector of an international stock exchange. Up to 10% of a portfolio may be invested in shares outside the defined sectors in companies that conduct similar business activities as those in the defined sectors. Due to both the nature and focus of these portfolios, they may be more volatile than portfolios that are diversified across a wider range of FTSE / JSE industry groups.

SA Benchmark: FTSE/JSE Resources index (J258T)
2.1.5 Equity – Financial portfolios - These portfolios invest at least 80% of the market value of the portfolios in shares listed in the FTSE/JSE Financials industry group or in a similar sector of an international stock exchange. Up to 10% of a portfolio may be invested in shares outside the defined sectors in companies that conduct similar business activities as those in the defined sectors. Due to both the nature and focus of these portfolios they may be more volatile than portfolios that are diversified across a wider range of FTSE / JSE industry groups.

SA Benchmark: FTSE/JSE Financials index (J580T)
2.1.6 Equity – Industrial portfolios – These portfolios invest at least 80% of the market value of the portfolios in industrial shares listed on the Johannesburg Stock Exchange or in a similar sector of an international stock exchange. Industrial shares include all companies listed on the JSE other than those shares listed in the FTSE / JSE Oil & Gas, Basic Materials, and Financials industry groups.

SA Benchmark: FTSE/JSE All Share Industrials index (J257T)
2.1.7 Equity – Unclassified portfolios - These portfolios invest in a single industry or sector or in companies that share a common theme or activity as defined in their respective mandates. Due to both the nature and focus of these portfolios, they may be more volatile than portfolios that are diversified across the broader market. The performance of these portfolios cannot be compared to others in this category. Should it be considered appropriate, where five or more portfolios focus on a particular theme a new category, will be created and the funds transferred.

2.2 Multi Asset Portfolios:
Multi Asset portfolios are portfolios that invest in a wide spread of investments in the equity, bond, money and property markets to maximise total returns (comprising capital and income growth) over the long term.

2.2.1 Multi Asset – Flexible portfolios - These portfolios invest in a flexible combination of investments in the equity, bond, money and property markets. The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolio’s mandate and stated investment objective and strategy. These portfolios may be aggressively managed with assets being shifted between the various markets and asset classes to reflect changing economic and market conditions and the manager is accorded a significant degree of discretion over asset allocation to maximise total returns over the long term.

2.2.2 Multi Asset - High Equity portfolios - These portfolios invest in a spectrum of investments in the equity, bond, money, or property markets. These portfolios tend to have an increased probability of short term volatility, aim to maximise long term capital growth and can have a maximum effective equity exposure (including international equity) of up to 75% and a maximum effective property exposure (including international property) of up to 25% of the market value of the portfolio. The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolios mandate and stated investment objective and strategy.

2.2.3 Multi Asset - Medium Equity portfolios - These portfolios invest in a spectrum of investments in the equity, bond, money, or property markets. These portfolios tend to display average volatility, aim for medium to long term capital growth and can have a maximum effective equity exposure (including international equity) of up to 60% and a maximum effective property exposure (including international property) of up to 25% of the market value of the portfolio. The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolios mandate and stated investment objective and strategy.

2.2.4 Multi Asset - Low Equity portfolios - These portfolios invest in a spectrum of investments in the equity, bond, money, or property markets. These portfolios tend to display reduced short term volatility, aim for long term capital growth and can have a maximum effective equity exposure (including international equity) of up to 40% and a maximum effective property exposure (including international property) of up to 25% of the market value of the portfolio. The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolios mandate and stated investment objective and strategy.

2.2.5 Multi Asset – Income portfolios – These portfolios invest in a spectrum of equity, bond, money market, or real estate markets with the primary objective of maximising income. The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolios mandate and stated investment objective and strategy. These portfolios can have a maximum effective equity exposure (including international equity) of up to 10% and a maximum effective property exposure (including international property) of up to 25% of the market value of the portfolio.

2.3 Interest Bearing Portfolios:
Interest Bearing Portfolios are collective investment portfolios that invest exclusively in bond, money market investments and other interest earning securities.
These portfolios may not include equity securities, real estate securities or cumulative preference shares.

2.3.1 Interest Bearing - Variable Term portfolios – These portfolios invest in bonds, fixed deposits and other interest-bearing securities. These portfolios may invest in short, intermediate and long-dated securities. The composition of the underlying investments is actively managed and will change over time to reflect the manager’s assessment of interest rate trends. These portfolios offer the potential for capital growth, together with a regular and high level of income.

These portfolios may not include equity securities, real estate securities or cumulative preference shares

SA Benchmark: JSE/ASSA All Bond index (ALBI)
2.3.2 Interest Bearing – Short Term portfolios – These portfolios invest in bonds, fixed deposits and other interest earning securities which have a fixed maturity date and either have a predetermined cash flow profile or are linked to benchmark yields, but exclude any equity securities, real estate securities or cumulative preference shares. To provide relative capital stability, the weighted average modified duration of the underlying assets is limited to a maximum of two. These portfolios are less volatile and are characterised by a regular and high level of income.

SA Benchmark: STeFI Composite index
2.3.3 Interest Bearing - Money market portfolios - These portfolios seek to maximise interest income, preserve the portfolio’s capital and provide immediate liquidity. This is achieved by investing in money market instruments with a maturity of less than thirteen months while the average duration of the underlying assets may not exceed 90 days and a weighted average legal maturity of 120 days. The portfolios are typically characterised as short-term, highly liquid vehicles.

SA Benchmark: STeFI 3-month index
2.4 Real Estate Portfolios:
Real Estate - General portfolios – These portfolios invest in listed property shares, collective investment schemes in property and property loan stock and real estate investment trusts. The objective of these portfolios is to provide high levels of income and long-term capital appreciation. These portfolios invest at least 80% of the market value of the portfolio in shares listed in the FTSE / JSE Real Estate industry group or similar sector of an international stock exchange and may include other high yielding securities from time to time. Up to 10% of a portfolio may be invested in shares outside the defined sectors in companies that conduct similar business activities as those in the defined sectors.

SA Benchmark: FTSE/JSE SA Listed Property index (J253T)

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WORLDWIDE PORTFOLIOS
These are collective investments that invest in both South African and foreign markets. No minima are set for either domestic or foreign assets.

2.5 Equity Portfolios:
Equity portfolios are collective investments that invest predominantly in shares listed on stock exchanges. These portfolios invest a minimum of 80% of the market value of the portfolio in equities and generally seek maximum capital appreciation as their primary goal. All new equity investments must conform 100% to the defined investment requirement of each category.

2.5.1 Equity – Unclassified portfolios - These portfolios invest in both local and foreign markets, but only in a single industry or sector or in companies that share a common theme or activity as defined in their respective mandates. Due to both the nature and focus of these portfolios, they may be more volatile than portfolios that are diversified across the broader market. The performance of these portfolios cannot be compared to others in this category. Should it be considered appropriate, where five or more portfolios focus on a particular theme, a new category will be created and the funds transferred.

2.6 Multi Asset Portfolios:
Multi Asset portfolios are portfolios that invest in a wide spread of investments in the equity, bond, money and property markets to maximise total returns (comprising capital and income growth) over the long term.

2.6.1 Multi Asset– Flexible portfolios - These portfolios invest in a flexible combination of investments in the equity, bond, money, or property markets. The portfolios have complete or stipulated limited flexibility in their asset allocation both between and within asset classes, countries and regions. No minimum or maximum holding applies to South African
or offshore investment. These portfolios are often aggressively managed with assets being shifted between the various markets and asset classes to reflect changing economic and market conditions to maximise total returns over the long term.

2.6.2 Multi Asset – Income portfolios - These portfolios invest in a spectrum of equity, bond, money market, or real estate markets with the primary objective of maximising income. The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolios mandate and stated investment objective and strategy. These portfolios can have a maximum effective equity exposure (including international equity) of up to 10% and a maximum effective property exposure (including international property) of up to 25% of the market value of the portfolio.

GLOBAL PORTFOLIOS
These are collective investment portfolios that invest at least 80% of their assets outside South Africa, with no more than 80% exposure to assets of a specific geographical region.

2.7 Equity Portfolio:
Equity portfolios are collective investment portfolios that invest predominantly in shares listed on stock exchanges. These portfolios invest a minimum of 80% of the market value of the portfolio in equities at all times and generally seek maximum capital appreciation as their primary goal. All equity investments must conform 100% to the defined investment requirement of each category.

2.7.1 Equity – General portfolios - These portfolios invest in selected shares from equity markets across the globe. They do not subscribe to a particular theme or investment style and will be invested across all market sectors, as well as across the range of large, mid and smaller cap shares. The portfolios offer medium to long-term growth as their primary investment objective.

Benchmark: MSCI World index (Total return)
2.7.2 Equity – Unclassified portfolios - These portfolios invest in a single industry or sector or in companies that share a common theme or activity as defined in their respective mandates. These portfolios may invest in selected shares across all sectors of stock exchanges. The performance of these portfolios cannot be compared to others in this category. Should it be considered appropriate, where five or more portfolios focus on a particular theme, a new category will be created and the funds transferred.

2.8 Multi Asset Portfolios:
Multi Asset portfolios are portfolios that invest in a wide spread of investments in the equity, bond, money and property markets to maximise total returns (comprising capital and income growth) over the long term.

2.8.1 Multi Asset – Flexible portfolios - These portfolios invest in a flexible combination of investments in international equity, bond, money, or property markets. The portfolios have complete or stipulated limited flexibility in their asset allocation both between and within asset classes, countries and regions. These portfolios are often aggressively managed with assets being shifted between the various markets and asset classes to reflect changing economic and market conditions to maximise total returns over the long term.

2.8.2 Multi Asset - High Equity portfolios - These portfolios invest in a spectrum of investments in the equity, bond, money, or property markets. These portfolios tend to have an increased probability of short term volatility, aim to maximise long term capital growth and can have a maximum effective equity exposure (including international equity) of up to 75% and a maximum effective property exposure (including international property) of up to 25% of the market value of the portfolio. The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolios mandate and stated investment objective and strategy.

2.8.3 Multi Asset - Medium Equity portfolios - These portfolios invest in a spectrum of investments in the equity, bond, money, or property markets. These portfolios tend to display average volatility, aim for medium to long term capital growth and can have a maximum effective equity exposure (including international equity) of up to 60% and a maximum effective property exposure (including international property) of up to 25% of the market value of the portfolio. The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolios mandate and stated investment objective and strategy.

2.8.4 Multi Asset - Low Equity portfolios - These portfolios invest in a spectrum of investments in the equity, bond, money, or property markets. These portfolios tend to display reduced short term volatility, aim for long term capital growth and can have a maximum effective equity exposure (including international equity) of up to 40% and a maximum effective property exposure (including international property) of up to 25% of the market value of the portfolio. The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolios mandate and stated investment objective and strategy.

2.8.5 Multi Asset – Income portfolios – These portfolios invest in a combination of equity, bond, money market, property or derivative instruments with the primary objective of maximising income. The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolios mandate and stated investment objective and strategy. These portfolios may have a maximum effective equity exposure (including international equity) of up to 10% and a maximum effective property exposure (including international property)of up to 25% of the market value of the portfolio.

2.9 Interest Bearing Portfolios:
Interest Bearing portfolios are collective investment portfolios that invest in bond and money market investments and other interest earning securities.
These portfolios may not include equity securities, real estate securities or cumulative preference shares.

2.9.1 Interest Bearing - Variable Term portfolios – These portfolios invest in bonds, fixed deposits and other interest-bearing securities from markets around the world. These portfolios may invest in short; intermediate and long-dated securities. The composition of the underlying investments is actively managed and will change over time to reflect the manager’s assessment of interest rate trends. These portfolios offer the potential for capital growth, together with a regular and high level of income.
These portfolios may not include equity securities, real estate securities or cumulative preference shares

2.9.2 Interest Bearing – Short Term portfolios – These portfolios invest in bonds, fixed deposits and other high interest earning securities in international markets, which have a fixed maturity date and either have a predetermined cash flow profile or are linked to benchmark yields, but exclude any equity securities, real estate securities or cumulative preference shares. To provide relative capital stability, the weighted modified duration of the underlying assets is limited to a maximum of two. These portfolios are less volatile and are characterised by a regular and high level of income.

2.10 Real Estate Portfolios:
Real Estate - General portfolios – These portfolios invest in listed property shares, collective investment schemes in property and property loan stock and real estate investment trusts. The objective of these portfolios is to provide high levels of income and long-term capital appreciation. These portfolios invest at least 80% of the market value of the portfolio in real estate shares and may include other high yielding securities from time to time. Up to 10% of a portfolio may be invested in shares outside the defined sectors in companies that conduct similar business activities as those in the defined sectors.

REGIONAL PORTFOLIOS
These are collective investment portfolios that invest at least 80% of their assets outside South Africa in a specified geographical region, including Africa, other than South Africa.

2.11 Equity Portfolio:
Equity portfolios are collective investment portfolios that invest predominantly in shares listed on stock exchanges. These portfolios invest a minimum of 80% of the market value of the portfolio in equities and generally seek maximum capital appreciation as their primary goal. All equity investments must conform 100% to the defined investment requirement of each category.

2.11.1 Equity – General portfolios - These portfolios invest in selected shares from equity markets in a specified geographic region. They do not subscribe to a particular theme or investment style and will be invested across all market sectors, as well as across the range of large, mid and smaller cap shares. The portfolios offer medium to long-term growth as their primary investment objective.

2.11.2 Equity – Unclassified portfolios - These portfolios invest in a single industry or sector or in companies that share a common theme or activity as defined in their respective mandates. These portfolios may invest in selected shares across all sectors of stock exchanges. The performance of these portfolios cannot be compared to others in this category. Should it be considered appropriate, where five or more portfolios focus on a particular theme a new category will be created and the funds transferred.

2.12 Multi Asset Portfolios:
Multi Asset portfolios are portfolios that invest in a wide spread of investments in the equity, bond, money and property markets to maximise total returns (comprising capital and income growth) over the long term.

2.12.1Multi Asset– Flexible portfolios - These portfolios invest in a flexible combination of investments in regional equity, bond, money, or property markets to maximise total returns over the long term. The portfolios have complete or stipulated limited flexibility in their asset allocation both between and within asset classes, countries and regions. These portfolios are often aggressively managed with assets being shifted between the various markets and asset classes to reflect changing economic and market conditions to maximise total returns.

2.13 Interest Bearing Portfolios:
Interest Bearing portfolios are collective investments that invest in bond and money market investments and those which seek to maximise interest income.
These portfolios may not include equity securities, real estate securities or cumulative preference shares

2.13.1Interest Bearing - Variable Term portfolios – These portfolios invest in bonds, fixed deposits and other interest-bearing securities from markets in a specified region. These portfolios may invest in short; intermediate and long-dated securities. The composition of the underlying investments is actively managed and will change over time to reflect the manager’s assessment of interest rate trends. These portfolios offer the potential for capital growth, together with a regular and high level of income.
These portfolios may not include equity securities, real estate securities or cumulative preference shares

6.13.2Interest Bearing – Short Term portfolios – These portfolios invest in bonds, fixed deposits and other high interest earning securities in international markets, which have a fixed maturity date and either have a predetermined cash flow profile or are linked to benchmark yields, but exclude any equity securities, real estate securities or cumulative preference shares. To provide relative capital stability, the weighted modified duration of the underlying assets is limited to a maximum of two. These portfolios are less volatile and are characterised by a regular and high level of income.

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Unit Trusts and Capital Gains Tax

Overview

Compared to other investment vehicles, unit trusts are a great deal in terms of Capital Gains Tax (CGT), which became from effective 1 October 2001:
• Unit trusts are exempt from paying CGT and unit trust investors will only incur CGT when they sell their units in a unit trust.
• Unit trust investors will only bear a CGT cost once - when they sell their units. When a portfolio manager restructures a unit trust portfolio, that is sells an underlying share or bond in adherence to its mandate, CGT will not be incurred. Certain other investment products, in comparison, will not be as tax effective. They will sustain a CGT cost every time a transaction in the portfolio is realized, which could be many times over the lifetime of a product. In the US, for example, where in contrast, unit trusts do pay CGT within the unit trust, extra costs to investors were more than 0,5% in 1999.
• Having CGT paid outside of the unit trust means that unit trust portfolio managers can focus on their core business of managing an investment portfolio according to a mandate, rather than being distracted by tax issues. This could result in more focused and better investment performance.
• The CGT rate applicable to unit trust investors could be as low as 4,5% depending on the investor's marginal tax rate or as high as 10,5%, which is on par with shares.
• Unit trust investors are empowered to decide when to become liable for CGT, allowing them to defer tax and to plan their investments appropriately. Relief measures such as the R10 000 exemption and the offsetting of losses against gains, can also be used.
• CGT policy for unit trusts is transparent. Unit trust investors will know when CGT is incurred.
In conclusion, CGT policy is in line with the objective of a unit trust as a medium- to long- term savings and investment vehicle and should encourage unit trust investors to treat them as such. You could, for example, not pay CGT for as long as 20 years, if you hold onto your investment. Unit trust investors should, however, not become obsessed with not paying CGT, thereby losing sight of their overall investment objectives.

All local and foreign unit trusts will be subject to CGT, except for money market funds, which have a fixed price and which generate income rather than capital gains or losses.

Understanding the Basics

On 1 October 2001, Capital Gains Tax (CGT) was implemented in South Africa. Up until this date capital gains have not been taxable in South Africa, only income as defined in the Income Tax Act, 1962.

To give effect to the proposals relating to CGT, an Eighth Schedule has been added to the Income Tax Act, which determines what constitutes a taxable capital gain or assessed capital loss. A new section 26A of the Act provides for the inclusion of a taxable capital gain in taxable income. Gains or losses are therefore not treated in terms of a separate taxation mechanism, but included in the existing income tax mechanism as set out in the Eighth Schedule.

Gains or benefits you may receive, by definition, are either capital or income. Whereas prior to 1 October 2001, if the amount was not income, the gain was tax free, it is now either included in your income or excluded by exemption in the Eighth Schedule. Understanding the treatment of various types of capital gains that you may enjoy in your lifetime is therefore important. This brochure sets out the treatment of one such asset, your unit trusts.

CGT as it Applies to Unit Trusts

The Association of Collective Investments, in its representations to SARS when CGT legislation was being drafted, strongly motivated that unit trust portfolios should be exempt from CGT. Unlike other share portfolios, CGT is not triggered when the portfolio manager sells shares within the portfolio. Unit trust portfolio managers are therefore enabled to manage the portfolio according to their mandate, without having to concern themselves with CGT.

However, upon deciding to sell your investment in a unit trust, CGT will be triggered. Thus the investor is empowered to decide when to become liable for the payment of CGT, with the benefit of deferring the tax and planning appropriately. Furthermore, there are other relief measures that can be utilized by the unit holder - these are explained below.

How Gains are Included in Your Income

The taxation of capital gains is triggered by your disposal of an asset. In this sense your role in managing your exposure to this tax is very important. When you decide to sell an asset, such as units in your unit trust portfolio, you are triggering a "CGT event".

Measuring Gains

To measure a gain, it is necessary to have a base off which to measure that gain. This "base" is referred to as the "base cost" in the Act. Hence, the gain or loss becomes the difference between the market value of your units at date of sale, less the base cost. It is important to realize that this gain or loss is calculated per individual asset that you may have sold. For unit trusts, the calculation is therefore done per fund.

Determining Aggregate Gains

Once the gain or loss has been calculated for each individual asset sold, the gains and losses are added together to determine an overall gain. Three relief measures apply:
• The first R30 000 profit is exempt from CGT for each taxpayer.
• Losses can be offset against gains.
• Losses can be carried forward.
Each tax year, the South African Revenue Service (SARS) will allow each taxpayer an exclusion of R30 000 on the sum of all realized capital gains and losses. This means that should you have sold units, the first R30 000 gain will be exempt from CGT. It also means that should units sold in one fund have been sold at a loss and the units from another sold at a gain, you have the benefit of setting off the loss against the gain. The net gain is then further reduced by the R30 000 exclusion benefit. If the sum of the capital gains and losses is negative, the aggregate loss must also be reduced by the annual exclusion of R30 000. In future years your net capital loss as assessed by SARS may be used to further reduce this figure, which is then referred to as a "net capital gain" or "assessed capital loss".

Rate of Inclusion in Your Income

In addition to the measures mentioned above, further relief is provided by including only a percentage of the "net capital gain" in your taxable income for the year. This rate is 66.6% for trusts and companies, and 33.3% for individuals. Hence, only 33.3% of the gain as calculated above is included in your taxable income and taxed at your marginal tax rate. It is important to realize that only gains are taken into account at this stage. Losses cannot be used to offset income. Such an assessed capital loss is, therefore, ring-fenced and can only be set-off against capital gains arising during future years of assessment.

Practical Considerations

Base Cost for Investments Made Prior to 1 October 2001

For unit holders invested before 1 October, an average price will be calculated, by using the average of the repurchase or sell price at which a unit would be redeemed by a unit trust management company, for the preceding five business days. Foreign unit trust funds, however, do not necessarily price their units every day, and will therefore be valued according to the last published sell price before 1 October 2001.

To make it easy for you to determine the base cost of existing unit trust investments, ASISA, will publish a list of all calculated prices for local and foreign unit trusts registered with the Financial Services Board and who are associate members of the ASISA on its web site at www.asisa.org.za
These prices will, in due course, be published in the Government Gazette by SARS. Furthermore, your individual unit trust management company should send you a statement following 1 October, clearly recording the base cost of your investment.

Base Cost for Investments Made on or After 1 October 2001

For investments made on or after 1 October 2001, the actual cost that you pay for the units, including any initial charges, is used to calculate the base cost. The unit trust management company will track your cost of purchases (e.g. debit orders) over time on a weighted average base cost basis, so that, when you sell units, the base cost will have been automatically calculated over time on your behalf. Each time you buy units the management company will recalculate the weighted average base cost by multiplying the existing number of units by the existing base cost of the units The total cost, calculated at the buy price, of the new units bought is added to obtain a new monetary value. This is then divided by the sum of existing units and new units to arrive at the new weighted average base cost of all units in the account.

The above method of calculating the base cost of units has been adopted as an ASISA standard and is the method of calculation that management companies are required to use when reporting capital gains to SARS in terms of legislation.

However, a unit holder is entitled to use any of the methods provided for in the Eighth Schedule of the Income Tax Act when computing gains or losses and reporting these to SARS. Section 30 of the Schedule provides for the time-apportionment method and section 32 deals with the base cost of identical assets and provides for using any one of the specific identification, first-in/first-out or weighted average methods.

A unit holder wishing to use any method other than the weighted average must ensure that all records are available to be furnished with the annual income tax return. It is recommended that the unit holder consults a tax expert or financial adviser prior to using the alternative methods.

Tax Returns

At the end of the tax year you will receive a statement (IT3E) from all South African unit trust management companies reflecting any gains or losses you may have incurred during the tax year. It is then up to the taxpayer to include any net gains in his or her tax return. All local management companies are obliged to send copies of the IT3E to SARS. Foreign unit trust funds will not issue tax statements and unit holders in these schemes are required to calculate the gains and losses themselves.

Events That Trigger a CGT Event and Need to be Taken Into Account in Your Tax Return
• Sales of units or switches out of a fund.
• Transfer of units, where beneficial ownership of the units change.
• The death, sequestration or emigration of a unit holder.
• The divorce of a unit holder married in community of property.
The management company will report the event as at the date of the transaction. However, a valuation certificate for an account can be obtained from the management company for the actual date of the event and be used in the unit holder's income tax return.

Events That DO NOT Trigger a CGT Event

Where a unit holder transfers units from a personal account with a management company to a bulk account of a Linked Investment Service Provider (LISP) or vice versa, or where a unit holder donates units to a spouse, no CGT event is triggered. The original base cost has to be transferred to the new account. To facilitate this management companies will issue valuation certificates to enable the base cost to be carried forward.
Kind permission of ASISA

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