- 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.
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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 of Collective Investment’s (ACI) 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 an 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 ACI 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 Association of Collective Investments, May 2007
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CLASSIFICATION OF SOUTH AFRICAN REGULATED UNIT TRUSTS
1. Classification:
The first tier of classification is as follows:
Domestic Funds: These are unit trusts that invest at least 70% of their assets in South African investment markets at all times.
Worldwide Funds: These are unit trusts that invest in both South African and foreign markets. A minimum of 30% of the assets should be held in South African markets, and a minimum of 30% of the assets should be held offshore, at all times. The 15% minimum requirement applies to all the sub-categories with the exception of the Worldwide - Asset Allocation Funds category.
Foreign Funds: These are unit trusts that invest at least 85% of their assets outside South Africa at all times.
Regional Funds: These are unit trusts that invest at least 85% of their assets in a single country or region, excluding South Africa, at all times.
Each of these categories is sub-categorised into the second tier of classification, namely:
i) Equity funds,
ii) Asset Allocation funds, and
iii) Fixed Interest funds.
The second tier of classification is further sub-categories in the following detailed sub-categories:
| Equity Funds | Asset Allocation Funds |
| Equity - General funds | Asset Allocation - Prudential funds |
| Equity - Growth funds | Asset Allocation - Flexible funds |
| Equity - Value funds | Asset Allocation - Flexible Property Funds |
| Equity - Large cap funds | |
| Equity - Smaller companies funds | Fixed Interest Funds |
| Equity - Mining & resources sector funds | Fixed Interest - Bond funds |
| Equity - Financial & industrial sector funds | Fixed Interest - Income funds |
| Equity - Financial sector funds | Fixed Interest - Money market funds |
| Equity - Varied Specialist funds | Fixed Interest - Varied Specialist funds |
2. Sector Definitions:
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DOMESTIC PORTFOLIOS
These are collective investment portfolios that invest at least 80% of their assets in South African investment markets at all times.
Equity Portfolios:
Equity portfolios are collective investment portfolios that invest predominantly in shares listed on the Johannesburg Stock Exchange. These funds invest a minimum of 75% of the market value of the portfolios in equities at all times and generally seek maximum capital appreciation as their primary goal. All equity and derivative investments must conform 100% to the defined investment requirement of each category. However,
a) a minimum of 80% must, at all times, be invested in the JSE Securities Exchange South Africa sector/s as defined by the category, and
b) a maximum of 20% may be invested outside the defined JSE Securities Exchange South Africa sector/s provided that these investments comply fully with the category definition.
- Equity - General portfolios - These portfolios invest in selected shares across all economic groups and industry sectors of the JSE Securities Exchange South Africa as well as across the range of large, mid and smaller cap shares. These portfolios do not subscribe to a particular theme or investment style. The portfolios in this category offer medium to long-term capital growth as their primary investment objective.
Benchmark: FTSE/JSE All Share Index (J203)
- Equity – Growth portfolios - These portfolios that seek maximum capital appreciation as their primary objective through investment in growth companies. Growth companies can be defined as those whose earnings are on or are anticipated to enter a strong and sustainable upward trend and typically trade on high price to earnings ratios (PE ratios). These portfolios are invested in growth companies across all Economic Groups of the JSE Securities Exchange South Africa.
Determination of a company as "growth share" takes into consideration the company's sustainable earnings growth on the basis of a combination of:
- The 2 year historical earnings growth and
- 1 year consensus I-net forecasts.
Benchmark: FTSE/JSE Style All Share Growth (J331)
- Equity - Value portfolios - These are portfolios that seek medium to long-term capital appreciation as their primary investment objective. The funds seek out "value" situations by typically investing in shares with low relative PE ratios as well as shares that are trading at a discount to their net asset value. These portfolios frequently offer a higher than FTSE/JSE All Share Index average level of income. These portfolios are invested in selected "value" shares across all Economic Groups of the JSE Securities Exchange South Africa.
Determination of a share as "value share" takes into consideration:
- The current PE trading at a discount to the average PE of the market.
- The dividend yield of the company significantly exceeding the dividend yield of the market.
Benchmark: FTSE/JSE Style All Share value (J330)
- Equity - Large cap portfolios - These portfolios seek long-term growth as their primary objective through investment in large market capitalisation shares which fall within the top 40 JSE Securities Exchange South Africa listed shares ranked by market capitalisation., i.e. included in the FTSE/JSE Top 40 Index.
Benchmark: FTSE/JSE Top 40 Index (J200)
- Equity - Smaller companies portfolios - These portfolios invest in established smaller companies as well as in emerging companies that are in the initial phase of their life. New investment by the funds are restricted to fledgling, small and mid-cap shares only and at least 75% of the fund will be invested in fledgling, small and mid cap shares at all times. Due to both the nature and focus of these portfolios, they may be more volatile than funds that are diversified across the broader market.
Benchmark: FTSE/JSE Mid Cap Index (J201)
- Equity - Resources and basic industries portfolios - These portfolios invest in companies whose principal business operations involve the exploration, mining, distribution and processing of metals, minerals, energy, chemicals, forestry and other agricultural and natural resources or where at least 50% of their earnings are derived from such business activities and excludes service providers to these companies. These portfolios invest primarily in securities listed in the FTSE/JSE Resources and Basic Industries economic groups and may be more volatile than funds that are diversified across a wider range of FTSE / JSE economic groups.
Benchmark: FTSE/JSE RESI 20 (J210)
- Equity - Financial portfolios - These portfolios invest in selected financial services companies including banks, insurance companies, brokerage firms and other companies whose principal business operations involve the provision of various financial service or where at least 50% of their earnings are derived from the provision of such financial services. The portfolios invest primarily in companies listed in the FTSE/JSE Financials Economic Group. These portfolios may be more volatile than portfolios that are diversified across a wider range of FTSE / JSE economic groups.
Benchmark: FTSE/JSE Financials Index (J580)
- Equity – Industrial portfolios – These portfolios invest in selected industrial companies listed on the JSE Securities Exchange South Africa but excludes all companies listed in the FTSE / JSE Resources and Financial Economic Groups.
Benchmark: FTSE / JSE Industrial (J257)
- Equity - Varied specialist portfolios - These portfolios invest in a single Economic Group or Industrial Sector or in companies that share a common theme or activity as defined in their respective mandates. However due to the unique nature of their mandates they cannot be categorised into any of the afore-listed categories. The performance of these portfolios cannot be compared to others in this category. Due to both the nature and focus of these portfolios , they may be more volatile than funds that are diversified across the broader market.
Should it be considered appropriate, where five or more portfolios share a common focus or theme as defined in their mandates , a new category will be created and the funds transferred, provided that a suitable benchmark can be established or index is published.
Asset Allocation Portfolios:
Asset Allocation portfolios are portfolios that invest in a wide spread of investments in the equity, bond, money and property markets.
- Asset Allocation – Prudential 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 would have an effective equity exposure (including international equity) below 40% at all times. These portfolios conform to legislation governing retirement funds, (Regulation 28 of the Pension Funds Act) and are thus suitable as investment vehicles for retirement portfolios. The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolios mandate and stated investment objective and strategy.
- Asset Allocation – Prudential 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 would have an effective equity exposure (including international equity) between 40% and 65% at all times. These portfolios conform to legislation governing retirement portfolios, (Regulation 28 of the Pension Funds Act) and are thus suitable as investment vehicles for retirement portfolios. The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolios mandate and sated investment objective and strategy.
- Asset Allocation – Prudential High Equity portfolios – These portfolios invest in a spectrum of investment 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 would have an effective equity exposure (including international equity) above 60% at all times. These portfolios conform to legislation governing retirement portfolios, (Regulation 28 of the Pension Funds Act) and are thus suitable as investment vehicles for retirement portfolios. The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolios mandate and stated investment objective and strategy.
- Asset Allocation – Prudential Variable Equity portfolios - These portfolios invest in a spectrum of investment 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 would have an effective equity exposure (including international equity between 0% and 75% at all times. These portfolios conform to legislation governing retirement portfolios, (Regulation 28 of the Pension Funds Act) and are thus suitable as investment vehicles for retirement portfolios. The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolios mandate and stated investment objective and strategy.
- Asset Allocation – 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 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.
- Domestic - Asset Allocation – Targeted Absolute and Real portfolios - These portfolios invest in a combination equity, bond, money, property markets or derivative instruments. 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 tend to display below average short term volatility and are mandated to manage towards a predetermined, explicit benchmark. These portfolios may not conform to legislation governing retirement portfolios, (Regulation 28 of the Pension Funds Act) and do not necessarily offer capital or performance guarantees.
Fixed Interest Portfolios:
Fixed Interest Portfolios are collective investments that invest in bond, money market investments and other income earning securities.
- Fixed Interest - Bond 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.
Benchmark: BEASSA All Bond Index
- Fixed Interest - Income 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 excluding any equities. To provide relative capital stability, the average modified duration of the underlying assets is limited to a maximum of two years. These portfolios are less volatile and are characterised by a regular and high level of income.
Benchmark: BEASSA All Bond 1 to 3 year split Index
- Fixed Interest - 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 one year while the average maturity of the underlying assets may not exceed 90 days. The portfolios are typically characterised as short-term, highly liquid vehicles.
Benchmark: Alexander Forbes Index
- Fixed Interest - Varied Specialist portfolios - These portfolios invests in bonds, fixed deposits, structured money market instruments, listed debentures and other high yielding securities. They seek to maximise income with either preservation and stability of capital, or an offer of potential growth of capital. The underlying risk and return objectives of individual portfolios may vary as dictated by each fund's mandate and stated investment objective and strategy. However, in terms of the investment mandates of these portfolios, they fall outside the existing sub-categories of the Fixed Interest sector. Should it be considered appropriate, where five or more portfolios have a similar focus, a new category will be created and the portfolios transferred.
Real Estate Portfolios:
- Real Estate – General portfolios – These portfolios invest in listed property shares, collective investment schemes in property and property loan stock. The objective of these portfolios is to provide high levels of income and long term capital appreciation. Due to liquidity constraints in the Real Estate sector on the exchange these portfolios must maintain a minimum effective exposure to real estate securities of 50% and may include other high yielding fixed interest and other securities from time to time.
Benchmark: FTSE / JSE SA Listed Property Index (J253)
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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.
Equity Portfolios:
Equity portfolios are collective investments that invest predominantly in shares listed on stock exchanges. These portfolios invest a minimum of 75% 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.
- Equity - General portfolios - These portfolios invest in selected shares from equity markets across the globe including South Africa. These portfolios will invest across countries and industry sectors as well as across the range of large, mid and smaller cap shares. These portfolios do not subscribe to a particular theme or investment style. The portfolios offer medium to long-term growth as their primary investment objective.
Benchmark: Morgan Stanley Capital World Index
- Equity - Varied specialist 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. Should it be considered appropriate, where five or more portfolios focus on a common theme, a new category will be created and the portfolios transferred.
- Equity - Technology sector portfolios - These portfolios seek capital appreciation by investing in companies whose principal business operations involve, or are expected to benefit from, changes in scientific or technological advances. These portfolios may be more volatile than portfolios that are diversified across many industry sectors.
Asset Allocation Portfolios:
Asset Allocation funds are funds 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.
- Asset Allocation - Flexible portfolios - These portfolios invest in a flexible combination of investments in the 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. No minimum or maximum holding applies to domestic 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.
Fixed Interest Portfolios:
Fixed Interest Portfolios are collective investments that invest in bond, money market investments and other income earning securities.
- Fixed Interest – Varied Specialist Portfolios – These portfolios invests in bond, fixed deposits, structured money market instruments, listed debentures and other high yielding securities. They seek to maximise income with either preservation and stability of capital, or an offer of potential growth of capital. The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolios mandate and stated investment objective and strategy. However, in terms of the investment mandates of these portfolios, they fall outside the existing sub-categories of the Fixed Interest sector. Should it be considered appropriate, where five or more portfolios have a similar focus, a new category will be created and the funds transferred.
FOREIGN PORTFOLIOS
These are collective investment portfolios that invest at least 85% of their assets outside South Africa at all times.
Equity Portfolio:
Equity portfolios are collective investment portfolios that invest predominantly in shares listed on stock exchanges. These portfolios invest a minimum of 75% of the market value of the fund 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.
- 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: Morgan Stanley Capital World Index
- Equity - Varied specialist 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. Should it be considered appropriate, where five or more portfolios focus on a particular theme a new category will be created and the portfolios transferred.
- Equity - Value portfolios - These portfolios seek medium to long-term capital appreciation as their primary investment objective. The portfolios seek out "value" situations by typically investing in shares with low relative PE ratios as well shares that are trading at a discount to their net asset value. These Portfolios invest in selected foreign value shares across countries, regions, and industry sectors and frequently offer a higher than average level of income.
- Benchmark: Morgan Stanley Capital Value Index
Asset Allocation Portfolios:
Asset Allocation 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.
- Asset Allocation - Flexible portfolios - These portfolios invest in a flexible combination of investments in international 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.
Fixed Interest Portfolios:
Fixed Interest Portfolios are unit trusts that invest in bond and money market investments and those which seek to maximise interest and rental income.
- Fixed Interest - Bond 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.
- Fixed Interest - Varied specialist portfolios - These portfolios invest in bonds, fixed deposits and other high income-earning securities in international markets.
Kind permission of ACI
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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 unitholder - 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 R10 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 R10 000 on the sum of all realized capital gains and losses. This means that should you have sold units, the first R10 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 R10 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 R10 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 50% for trusts and companies, and 25% for individuals. Hence, only 25% 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, the Association of Collective Investments, 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 Association on its web site at www.aci.co.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 ACI 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 unitholder consults a tax expert or financial adviser prior to using the alternative methods.
Foreign Currency Gains
The regulations on foreign currency transactions are available as a draft and have as at the date of writing, not been finalized by SARS. This is expected by the end of 2002. It is, however, expected that foreign exchange gains realized at the time of sale of units in a fund denominated in a foreign currency and converted back into Rands, will represent a taxable gain.
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 unitholders 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 ACI
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