Market Statistics are calculated by Sharenet and are therefore not the official JSE Market Statistics. The calculation/derivation may include underlying JSE data.
Regulation and operation | ||
| The Unit
Trust Act that governs the unit trust industry in South
Africa was first drafted in 1947. Amendments do take
place, as occurred in 1962, 1981 and again in 1988. The
Act contains a number of very important provisions, some
of which we will mention briefly in the next section. The reason for giving this brief discussion of the Act, is to demonstrate that the industry has good controls and has good regulations. While any stock exchange investment contains a certain risk element to the investor, the Act and Trust Deeds safeguards tend to minimize this risk.
The trust deed This is an agreement between the management company and the trustee to establish a unit trust scheme. Another very important aspect of the trust deed is the investment philosophy that it explains - we shall consider this in more detail. The Act and the trust deed stipulate that unit trusts may include the following securities: Shares, stocks, debentures, debenture stock and debenture bonds as well as cash. Portfolio managers The actual decision about what investments to make rests with the portfolio managers of each of the unit trusts and also include the Board of Directors of the Management Company. The process involved in making this decision has many safeguards built into it. Furthermore, the trust deed states clearly that investments must be made at fair market-prices in the securities of financially sound companies with the object of achieving:
The investment philosophy This is incorporated in the trust deed and makes provision for increasing long-term growth in the value of the units. Shares may not be traded with a view to increasing the value of the portfolio - speculation in shares is therefore not allowed. However, this does not prevent the portfolio manager from being able to sell any investments when this is considered appropriate. Management, trustees & investors There are the three separate bodies which are involved in the operation of a unit trust. They are often confused and should therefore be studied carefully: They are the management company, the trustee and the investors. The unit trust portfolios must not be confused with the management company.
Unit trust employees are employed by their management companies and although they are referred to as Old Mutual Unit Trusts or Sanlam Unit Trusts, this name actually refers to the several funds which the management company may manage, viz. the Investors' Fund, Mining Fund, Income Fund, Gold Fund, Industrial Fund and Top Companies Fund. The trustee of each of these funds is usually a bank or building society and a separate trust deed exists between the management company and the trustee for each of these funds. Once a trust deed has been completed, a unit trust comes into operation when the management company deposits assets with the trustee. These assets may be in any form which is permitted in terms of the trust deed - cash or approved securities. Once these assets have been handed to the trustee, the management company can create units and start selling them. One could compare the management company selling units to a grocery store selling tins of jam or condensed milk. Both the management company and the grocery store market products, although the management company sells only one product - units! However, it is vital to remember that a management company cannot sell units if there are no assets "behind" those units. The assets in the unit portfolio and which are held by the trustee must equal the value of the units created. As the management company sells units, so the stock of units gradually diminishes. As it receives money from the investors for the units sold to them, it deposits this money with the trustee. These further funds in the safekeeping of the trustee enable the management company to create more units when the stock of units becomes too low. As these latter units are sold, so the management company can use the money realised from the sale of units to create more units, if more are needed. In a similar way it may also cancel units if the repurchase of units from investors exceeds the sale of units to investors. It is important to note that when investors sell units, this does not initially affect the value of the fund. Trading in units takes place between the management company and the investors. However, if investors sell units on a large scale, the management company may eventually have to cancel units or even sell some of the securities to have sufficient cash available to pay investors who wish to sell their units (a repurchase transaction for the management company). When units are cancelled, cash flows back to the management company and if the fund does not have sufficient cash in its portfolio it may have to sell some of its securities to obtain this. Investors occasionally also refer to selling their units as cashing, realizing or redeeming them. According to the trust deed, the management company is compelled to pay out the value of a repurchase transaction to an investor within 14 days of it receiving the required documentation. Pricing and returns The calculation of the daily unit trust fund prices is a very technical operation and will therefore be covered very superficially in this section. In the first instance it is important to note that most of the trusts' prices are worked out on a forward pricing basis. This means that the prices quoted in the press are the prices that would apply to investors who bought or sold units on the previous day. At the end of each day the market value of the investment portfolio of each of the unit trusts is calculated. This is done by obtaining the ruling prices of all shares. Once the value of the portfolios has been determined, the total number of units that has been issued is established and the units are divided into the value of the fund to give what is called the basic price. To this is added the income accruals and in the case of the buying price, the compulsory charge factor and an initial charge are also added. Standard definition of buyer's & seller's price All unit prices are calculated on a daily basis. The buyer's price, the seller's price and the yield for each fund are published in most of the major newspapers. The buyer's price is the price at which you buy units from the unit trust company. You buy units every time you invest money in unit trusts. The seller's price is the price at which you sell your units back to the unit trust company. You are able to sell your units at any time. |