Paging through the financial press, you may notice your unit trust prices quoted as Net Asset Value (NAV) rather than the old ”buy” and ”sell”.
This is just one of the more visible changes introduced by the Collective Investment Schemes (CIS) Act. The NAV is the market value of the fund, calculated daily, and divided by the number of units issued. The old ”buy” and ”sell” prices created a little extra fat for the management companies, so their elimination is good for investors.
The Act has provenance over all pooled investments, such as unit trusts and pooled pension funds, and introduces many positive changes for investors. Fund managers must disclose details such as fund investment objectives, method of calculating the NAV and dealing prices, charges, risk factors, distribution of income accruals, and all other information necessary to make an informed decision.
The CIS Act also introduces changes in the way unit trusts manage their portfolios. One important change is the scrapping of the old obligation on funds to hold 5% of the portfolio in cash to meet demand from sellers. This made it more difficult for funds to replicate the performance of their chosen benchmarks, such as the ALSI 40 index.
Until now, asset managers could not invest more than 10% of the portfolio in a single large cap share (above R2-billion), or 5% for smaller counters. These rules still apply, but managers are now allowed to increase a share’s weighting in an index up to 120%. Diversified funds such as general equity and growth funds may not hold more than 20% of the portfolio in any single share.
Initial charges on purchasing unit trusts now have to be separately itemised rather than incorporated into the purchase price. The new legislation allows management companies to charge trading costs directly against the fund, so the need to recover brokerage and marketable securities tax from investors as part of the entry costs falls away.
Restrictions have also been imposed on management companies holding more than 10% of their portfolios in the parent or group companies (a sneaky way of boosting papa’s share price in the past).