Structure & Mandates

Structure of a unit trust

Each unit trust comprises three separate legal entities: the fund, the trust and the management company.

The fund is made up of the cash contributions of many individuals. This collection or pool of funds is invested in shares, cash, gilts and sometimes property. The fund belongs to the trust and not the management company, so it is not affected by the financial position of the management company. Thus, in the recent problems with Regal Treasury Bank, for example, the assets of unit holders were secure, as they were "off balance sheet".

The trust itself is governed by a trust deed which falls under the authority and supervision of the Financial Services Board. Each unit trust is legally obliged to appoint trustees(often a bank) to exercise fiduciary control. They have two main functions:

• To act as custodians of the cash and securities in the fund. All the assets of the fund are held in the trust's name and it is the trustees that issue certificates to the unit holders.
• To ensure that the fund is managed according to the mandate set out in the trust deed.

The management company administers the fund. To ensure that the management company "puts it's money where its mouth is", and has a vested interest in the performance of assets under management, all management companies are obliged to hold an investment of at least 10% of the total amount of units in each unit portfolio. (This can be limited to R1 million, subject to the approval of the FSB.) Some management companies invest more than 10% of their own assets in their funds as a way of demonstrating their faith in their own products.

Management companies charge unit holders two types of fees for the management of their money - an initial creation fee and an annual management fee, both of which are liable for VAT (see Pricing for details). The management company may deduct fees only from accrued income, and not capital invested in the fund. The assets of the fund remain unaffected, despite the financial position of the management company.

Mandates

Unit trust fund mandates are important because they give investors three types of information:

The fund objective: This usually gives investors an idea of the investment risk associated with the fund.

The range of the fund's investable universe: This will indicate the types of shares the unit trust fund manager can choose from.

The fund's benchmarks or yardstick: Most unit trust funds have an index or benchmark against which the performance is based. There are no readily accepted benchmarks for the asset allocation category of unit trusts so these funds often use the Consumer Price Index (CPI) as a benchmark. Sometimes these funds are compared with their peers in the same category.

Constraints: The unit trust management company may impose further restraints on the fund manager than those required by the Association of Unit Trust's classification system. For example, even though a general equity unit trust fund may permit a fund manager to have a maximum liquidity of 25%, the mandate of the fund may stipulate that the fund should be "between 85% and 90% invested at all times.

The FSB ensures that fund managers stick to their mandates. Funds that do not adhere to their mandates risk being classified in a new category and losing their performance record.