Unit Trusts 101: A Hands-Off Approach to Wealth

Before the dawn of the smartphone app and the fractional share, there was the Unit Trust 101.

For decades, this was the bedrock of South African savings culture. If your parents invested money for your university education or your grandparents saved for retirement, they almost certainly did it through a Unit Trust. It was the “gold standard” of the industry—safe, regulated, and professionally managed.

However, in recent years, the Unit Trust has come under fire. The rise of Exchange Traded Funds (ETFs) and low-cost passive investing has led many young investors to view Unit Trusts as dinosaurs: expensive, clunky, and outdated.

Is this fair? Or are we throwing the baby out with the bathwater?

As an analyst, I believe the “Active vs. Passive” debate is often misunderstood. While ETFs are fantastic (and I recommend them often), Unit Trusts 101 still play a vital role in a sophisticated portfolio, particularly for investors who want a human hand on the wheel to navigate South Africa’s unique economic volatility.

In this comprehensive guide, we will dust off the concept of the Collective Investment Scheme. We will explain exactly how they work, why “Forward Pricing” matters, how to spot exorbitant fees that destroy your wealth, and when it makes sense to pay a professional to manage your money.

To see where Unit Trusts fit into the hierarchy of asset classes, I strongly recommend you read our foundational pillar: The Ultimate Guide to Investing in South Africa.

What is a Unit Trust? (The Collective Power)

Technically known as a Collective Investment Scheme (CIS), a Unit Trust is conceptually very simple.

Imagine you want to buy shares in the JSE, but you only have R500. With that amount, you can’t buy a diversified portfolio. You can’t afford the research tools to analyze the market. You are a small fish in a big ocean.

So, you pool your R500 with thousands of other investors. Suddenly, that pool is worth R10 billion. With R10 billion, you can hire the smartest fund managers in Cape Town or Sandton. You can buy stakes in hundreds of companies. You can negotiate lower trading fees.

How it works:

• The Pool: The total money is divided into equal “units.”
• The NAV: The price of one unit is called the Net Asset Value (NAV). If the investments in the pool go up, the NAV goes up.
• The Mandate: The fund manager cannot just do whatever they want. They must stick to a legal “mandate” (e.g., “We will only buy Top 40 shares” or “We will only buy Property”).

This structure is strictly regulated by the FSCA (Financial Sector Conduct Authority) to ensure your money is safe from theft or fraud (though not from market losses).

The Great Debate: Unit Trusts 101 vs. ETFs

If both ETFs and Unit Trusts are “baskets of shares,” what is the difference? This is the most common question I get at dinner parties.

The difference lies in Management Style and Trading Mechanics.

1. Active vs. Passive (The Brain vs. The Computer)

• ETFs (Passive): Usually track an index. A computer simply buys the companies in the Top 40. It doesn’t think. It doesn’t analyze. It just copies the market. Because no expensive analysts are needed, fees are low.
• Unit Trusts 101 (Active): Most (but not all) Unit Trusts are “actively managed.” A human fund manager (like those at Allan Gray or Coronation) analyzes the market. They try to beat the index. They might look at MTN and say, “This is undervalued, let’s buy more,” or look at Sasol and say, “This is risky, let’s sell.” You pay higher fees for this human intelligence.

2. Live Pricing vs. Forward Pricing

• ETFs: Trade like shares. The price changes every second. You can buy at 10:00 AM and sell at 10:05 AM.
• Unit Trusts: Use “Forward Pricing.” The price is calculated only once a day (usually at close of business). If you submit a buy instruction today, you often won’t know the exact price you paid until tomorrow. This makes them unsuitable for day trading, but perfect for long-term investing.

The Fee Structure: The Silent Wealth Killer

This is where Unit Trusts often get a bad reputation. Because you are paying for a team of analysts, offices, and research, the costs are higher.

You must scrutinize the Total Investment Charge (TIC).

• Low Cost: 0.5% to 1.0% (Excellent).
• Average: 1.1% to 1.6% (Acceptable for good performance).
• Expensive: 2.0% to 3.0% (Highway robbery).

The Performance Fee Trap: Some Unit Trusts charge a “Performance Fee.” This means if they beat the market, they take a cut of the upside (often 20% of the outperformance). While this incentivizes them to win, it can result in massive fees during good years. Always check if your fund has a “High Water Mark” (meaning they can’t charge you performance fees again until they recover any past losses).

Types of Unit Trusts: The Menu

When you log into a platform like Glacier or your banking app, you will see thousands of funds. They are categorized by the ASISA (Association for Savings and Investment South Africa) codes.

Here are the main categories you need to know:

1. Money Market Funds

• Risk: Very Low.
• What they buy: Cash, bank deposits, and short-term government debt.
• Role: This is a parking bay for your emergency fund. It beats a standard bank savings account but barely beats inflation.

2. General Equity Funds

• Risk: High.
• What they buy: Shares on the JSE (minimum 80% equities).
• Role: Long-term growth (7+ years). This is where you put money you want to double over a decade.

3. Multi-Asset (Balanced) Funds

• Risk: Moderate.
• What they buy: A mix of everything—Shares, Bonds, Cash, and Property.
• Role: These funds usually comply with Regulation 28, making them perfect for Retirement Annuities. The fund manager decides when to switch from shares to cash, so you don’t have to.

4. Global Feeder Funds

• Risk: High (Currency volatility).
• What they buy: They take your Rands, convert them to Dollars/Euros, and invest in a “Master Fund” offshore.
• Role: This is the easiest way to get offshore exposure without physically moving money across the border. You invest in Rands, and you get paid out in Rands, but the growth is linked to global markets.

The Case for Active Management: Is It Worth It?

If ETFs are cheaper, why do Unit Trusts still exist? Because sometimes, the market is wrong.

In highly efficient markets like the US (S&P 500), it is very hard for a human to beat the computer. In these markets, passive ETFs usually win. However, in inefficient markets (like South Africa or Emerging Markets), a smart human can find opportunities that the index misses.

Example: The “Steinhoff” Defense If you bought a passive Top 40 ETF in 2017, you automatically bought Steinhoff because it was a large company. When Steinhoff crashed due to fraud, your ETF crashed with it. Many active Unit Trust managers (like Allan Gray) analyzed Steinhoff’s books, saw red flags, and refused to buy it. Their clients were protected from the crash. This is what you pay fees for: Downside Protection.

How to Invest: LISPs vs. Direct

You can access Unit Trusts in two ways.

1. Direct from the Management Company (ManCo)

You go to the Coronation or Ninety One website, fill in forms, and send them money.

• Pros: Sometimes slightly lower administration fees.
• Cons: You can only buy their funds. If you want to switch from Coronation to Allan Gray, you have to sell, withdraw cash, and re-invest (triggering tax).

2. Linked Investment Service Providers (LISPs)

A LISP is a “supermarket” platform (like Allan Gray Platform, Glacier, or Sygnia).

• Pros: You can hold funds from different competitors (e.g., one Ninety One fund and one Coronation fund) in the same account. You can “switch” between them without the money ever hitting your bank account, which is administratively easier.
• Cons: You pay a small “Platform Fee” (usually 0.2% to 0.5%) on top of the fund fee.

Tax Implications: What You Need to Know

Unlike a Retirement Annuity, a standard Unit Trust is a discretionary investment. The taxman is watching.

• Income Tax: Any interest earned by the fund (from cash or bonds held inside) is taxed as part of your income.
• Dividends Tax: The fund automatically withholds 20% tax on dividends before paying them out or reinvesting them.
• Capital Gains Tax (CGT): This is the big one. You only pay CGT when you sell units.
  • Warning: Switching from Fund A to Fund B counts as a “sale.” It triggers a tax event even if you didn’t withdraw the cash. Be careful of over-trading your portfolio.

Minimums and Accessibility

One of the great democratizing features of Unit Trusts is accessibility. Most funds allow you to start with a debit order of R500 per month or a lump sum of R5,000. This makes them an excellent tool for automated wealth building. You set the debit order to go off on payday, and you forget about it. The fund manager handles the rebalancing, the dividend reinvestment, and the asset allocation.

The Hands-Off Hero

For the hyper-active investor who watches charts all day, Unit Trusts are boring. But for the doctor, the engineer, or the teacher who is busy building a career and doesn’t have time to analyze P/E ratios, they are a godsend.

A good Unit Trust allows you to outsource the stress of decision-making to a professional. Yes, you pay a fee for it. But if that professional manages to avoid the next corporate scandal or navigates a market crash better than you would have, that fee is the best investment you ever made.

Don’t dismiss them as “old school.” In a volatile world, sometimes “old school” wisdom is exactly what your portfolio needs.

Your Next Step: Log into your internet banking or visit a comparison site like Morningstar. Look at the “Multi-Asset High Equity” category. Compare the 10-year performance of a top Unit Trust against the JSE All Share Index. If the Unit Trust has beaten the market after fees, it deserves a spot on your watchlist.