Unit trust managers to tell you more

New disclosure requirements that became legally effective this month will enhance transparency in the unit trust industry while unit trust companies and life assurers work towards a common measure of investment costs they may be required to disclose in the future.

The two industries are working together, through the Association for Savings & Investment SA (Asisa), on a standardised measure of investment costs, known as the effective annual cost (EAC). If the new measure becomes a mandatory disclosure, it will be possible to compare costs across collective investments and life assurance portfolios – something that has long eluded investors and their advisers.

Meanwhile, investors in collective investment schemes will be first to benefit from moves towards standardised disclosure about financial products, likely to be enforced when new legislation aimed at regulating the conduct of financial services providers is introduced under a new market conduct authority. The new authority will be created after the Financial Sector Regulation Bill is enacted.

A board notice issued in terms of the Collective Investment Schemes Control Act (Cisca) by the Financial Services Board (FSB) in August last year became effective this month (see “What you need to be told”, below). It will result in collective investment scheme companies publishing minimum disclosure documents or amending their fund fact sheets to meet the new disclosure requirements.

Until this month, unit trust companies within Asisa have followed a voluntary code for advertising collective investment schemes, but there were no legal requirements for the information provided on fund fact sheets, only some requirements relating to what may not be published.

This code fell within the code of the Advertising Standards Authority of South Africa, and was administered by Asisa. But the International Monetary Fund and World Bank’s Financial Sector Assessment Programme identified this as problematic, because Asisa is not a proper self-regulatory industry body.

The sector regulator, the FSB, therefore undertook to publish requirements for advertising and disclosures about collective investment schemes. The board notice under Cisca now obliges schemes to submit to the FSB for approval all their marketing and advertising material, fund fact sheets, application forms and the new minimum disclo-sure documents.

Anthony Katakuzinos, the retail chief operating officer at Stanlib, says regulatory oversight of this material is not a fundamental shift, because unit trust companies are already disclosing much of the information, but there are some new requirements and the requirements are now more clearly detailed.


The mandatory minimum disclosure documents must be given to you before you invest, or top up or switch collective investment schemes.

In the documents, collective investment scheme companies must tell you the objectives of a fund, its risk profile, its performance and its costs, and the information must be updated quarterly. In addition, unit trust funds and other collective investments are obliged to make quarterly disclosures on how the fund performed relative to its stated objectives and any asset changes within the fund portfolio.

Currently, unit trust managers are required to publish total expense ratios (TERs) for their funds. These reflect the asset management fees, performance fees, custodian and trustee fees, and audit fees paid from within the fund, but, in line with international norms, TERs exclude trading costs, such as stockbroking costs and Strate fees. TERs are typically published quarterly for the past year.

In terms of the FSB’s board notice, fund managers will continue to be required to publish TERs for their funds, but Asisa has decided that its members will publish the TERs for funds on a rolling three-year basis, Peter Blohm, Asisa’s senior policy adviser, says.

Asisa has also decided that its members should publish their trading costs to help Asisa determine the EAC.

Blohm says it is likely that the EAC will be disclosed to you in quotations from unit trust companies issued from next year.

While the collective investment scheme industry has been publishing TERs as a measure of investment costs, the life assurance industry has been publishing a different measure, known as the reduction in yield (RiY). The RiY shows the effect of costs as an erosion of value or reduction in the yield or return you will earn on your investment annually over a fixed term.

Having two different measures is highlighted as a major problem by the Financial Planning Institute (FPI), the professional body for financial planners, in its response to proposals in the FSB’s Retail Distribution Review (RDR) document published late last year. (The RDR document contains proposals aimed at improving the way in which you are advised about and sold financial products.)

The FPI says there needs to be a greater focus on product providers’ practices that are unfair to you, including those relating to the provision of information on costs that would allow proper comparisons across products.

Fortunately, Asisa’s work on the EAC measure is advanced and is currently being tested among financial advisers and consumers.

The new measure will show you the effect of costs on your investment over five and 10 years and a rand amount of the costs you will pay, using performance assumptions based on the inflation rate, Blohm says.

Blohm says the new measure, which has been developed in consultation with the FSB and National Treasury, is “a blend” of the TER and the RiY measures.


In a discussion document on the future regulation of financial services by the new market conduct authority that will replace the FSB, Treasury states that the intention is that the authority will issue standards for certain financial products. These will include minimum disclosures about the products that companies will be required to make to you, the consumer.

It is expected that, in future, the EAC measure may become the required standard cost measure that must be disclosed to you when investing in collective investment and life assurance products.

Jurgen Boyd, the FSB’s deputy registrar for collective investment schemes, says the Cisca board notice is just the first step in improving disclosure, and refinements will be made when the new market conduct authority is up and running.


The Financial Services Board’s Board Notice 92, which was gazetted in August last year, should result in you getting more information about your unit trust investments from the end of this month and again after the end of this quarter to June 30.

All information must be in plain language without technical jargon and must be “fair, consistent, transparent and accurate”.

Before you invest or make changes to an existing investment, you must receive a minimum disclosure document that is no more than four pages and includes the following information, which many fund managers have not previously published:

* The essential characteristics of the portfolio or portfolio class, which will enable you to understand the nature and the risks of the portfolio and make informed investment decisions.

* The risk and reward profile of the investment, including appropriate guidance on and warnings about the risks associated with the portfolio.

* The fact that the manager does not provide any guarantee and that your investment can go down as well as up.

* The fact that you can get a schedule of fees and charges and maximum commissions.

* A detailed account of how any performance fees were calculated.

* In the case of exchange traded funds (ETFs), minimum disclosures must include:

– The fact that ETFs are listed on stock exchanges and may therefore incur additional costs;

– The difference between ETFs and other collective investment schemes;

– The index that the ETF tracks and how it tracks it;

– Where an investor can view the index and its performance as tracked by the ETF; and

– Information on any securities lending activities in which the ETF is engaged. ETFs typically lend the securities in which they invest to other fund managers and earn an income for their funds by doing this.

* In the case of money market funds, fund managers will be required to disclose:

– The fact that a money market portfolio is not a bank deposit account.

– Whether the money market fund targets a constant unit value, as is the case with most money market funds, in which one unit equals R1, and a change in the value of the underlying securities results in a change in the fund’s yield rather than its unit value.

– The fact that while most changes in the value of the underlying securities will result in a change in the yield, abnormal losses could result in capital losses. This was the case when trading in Abil debt was suspended and values written down in August last year. Many investors in money market funds were shocked to find that they had lost some of their capital, because they had not understood that, although a rare occurrence, this was a risk of investing in these funds.

– How yields are calculated and that excessive withdrawals could result in liquidity issues, which could result in managers delaying payouts rather than paying you out immediately, as is normally the case.

* In the case of foreign currency-denominated unit trust funds, managers will be required to disclose any material risks including those pertaining to:

– Potential liquidity constraints that may hamper the repatriation of your funds;

– Macro-economic risks;

– Political risks;

– Foreign exchange risks;

– Tax risks;

– Risks of delays in getting settlements for securities that have been sold; and

– Potential limitations on the availability of market information.

* On a quarterly basis, managers will be required to publish a general investor report that gives you details of:

– The number of units you hold;

– The units’ net asset value;

– An analysis of how the portfolio was managed relative to its policy objective;

– The total expense ratio; and

– A statement of changes in the composition of the portfolio during the reporting period.

In publishing performance data, which most managers include on their fact sheets, managers will be obliged to comply with the following requirements:

* In addition to annualised returns, funds must publish both the highest and lowest returns achieved over the period for which the annualised returns are published.

* The charges for the most expensive class of fund available for direct investment. Unit trust companies typically offer institutional investors such as retirement funds and linked investment services providers (lisps) unit classes that have lower costs than those offered to direct investors.

* Performance data must not only reflect cumulative performance; it must include what the cumulative performance amounts to as an average annual return for any period and the performance of the relevant benchmark over that period.

* Performance data must be for a minimum of the past 10 years or, if the fund has been in existence for less than 10 years, for the period since the fund’s inception.

* Performance data must include the highest and lowest average annual return for the period over which the performance is reported.

* Performance figures can be quoted only if a fund has at least a one-year history and then it must be quoted in multiples of full years or on a rolling one-year basis.

* When a manager’s performance is ranked against those of other managers in a particular sub-category, the performance of the manager’s most expensive class of fund must be reflected. This performance ranking can be advertised only if there are at least five funds in the relevant peer group.

* The basis on which performance is measured must be disclosed.

Unit trust companies will also be required to assess whether a fund is suitable for a certain type of investor before it states as much in any advertising material.

If any tax benefits are advertised as being relevant to a particular fund, managers are required to state any qualifications and to state to whom the tax benefits apply.


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