For most investors, unit trusts represent the most convenient way into the equity, bond, property and offshore markets. For as little as R50/month, investors get access to a broad portfolio.
A similar spread is obtainable through a pure investment endowment policy, but unit trusts have always had a clearer charging structure and have more willingly disclosed their portfolios.
For much of the 1970s and until the mid-1980s, unit trusts were considered the junior relation of life policies. Until 1992 the maximum fee that could be charged was 0,5%. It was then raised to 1% and, in 1998, industry charges were deregulated.
This allowed unit trust management companies to charge different fees to different classes of unit holder. They could, for instance, charge 0,4%/year to institutional investors such as pensions, but charge 1,75% to clients with small debit orders (say, less than R250/month), passing 0,5% to the intermediary.
At the same time, money market funds were introduced. They gave investors access to wholesale bank rates in a flexible product.
A further source of growth has been institutional funds, which can be subdivided into genuine institutional funds - these funds are used as the underlying funds or building blocks of multimanager portfolios. It is a convenient mechanism for pooling pension funds and they contain no retail money. Another category of institutional funds are wholesale or proprietary funds. Investors can still buy these funds, provided that they use an approved distribution channel such as Citadel's financial planners or Acsis's broking partners.
Unfortunately, these wholesale funds do not provide daily disclosure to data providers such as S&P and Moneymate. Their ranks have been swelled in recent months by a proliferation of broker funds. In the late-1980s the UK had thousands of often subscale broker funds. When full disclosure came into financial services, it was obvious that few of these funds were adding value.
Are the prospects for SA's broker funds (sometimes called white-label funds) any rosier? Association of Collective Investments (ACI) chairman John Kinsley says the Financial Services Board is watching the development of white-label funds carefully. Though these are new unit trusts, in practice they are a conversion of the old wrap funds (a loose collection of unit trusts in a segregated portfolio) into a pooled fund of funds vehicle.
In some cases white labelling is the first step to setting up a management company - Oasis, for example, was originally "hosted" by Fedsure and when it had acquired a track record it was permitted to set up its own unit trust management company. Fraters is going down a similar route.
Kinsley says there will continue to be debate about white-label funds. One school of thought believes that many of the brokers who act as "fund managers" for the white-label funds have no genuine asset management experience.
Kinsley says that in the year ahead the industry faces challenges around the financial sector charter. "Access is an issue because we have not been successful in the lower LSMs.
That partly reflects the way commissions are paid. If an intermediary sells a R50/month recurring contribution he gets only R1,50/month in commission. The fees on such low premium investments make them subeconomic for many management companies."
He says more work needs to be done to develop black intermediaries - in co-operation rather than in competition with the Life Offices Association.
The ACI has also committed itself to substantial consumer education initiatives, so potential investors understand the volatility of investments and invest in unit trusts only if they are prepared to make a three- to five-year commitment.
The unit trust industry isn't undertaking these initiatives as a survival strategy. In its existing predominantly white market it is growing strongly.
Industry assets have increased almost threefold to R319bn. On top of this, there is a further R46bn invested in the locally registered offshore funds.
The shape of the industry has changed significantly as investors move out of equity funds (what most people still associate with the term unit trust) and into fixed-interest and asset-allocation funds.
ACI CE Di Turpin says the industry used to resemble closely the UK, in which 74% of unit trust assets are in equities. Now, with 31% in equity funds and 34% in money funds, it more closely resembles the industries in France and Luxembourg.
"South Africans have become more risk averse. But there is an opportunity cost in taking such a conservative stance." Turpin says investors started to pile into equity funds in the March 2005 quarter, just when the bull market was running out of steam.
Not all managers have benefited from this revival - most of the flows (other than a hefty chunk moved into RMB Core Equity, an institutional fund) have gone into Allan Gray Equity and Nedbank Rainmaker, and to a lesser extent RMB Equity and Investec Equity.
Other funds, such as Old Mutual High Yield Opportunity and Investec Value, have been victims of their own success and have been forced to close to new business - highly focused funds cannot get any larger than about R3bn or it will be difficult for them to find sufficient quantities of shares in the companies they like.
For many asset managers, unit trusts are a shop window rather than an important profit centre. Last year, the practice of box trading, or trading in their own units, was banned, which hit profitability.
But it is a scale game, with high fixed costs in the administration platform, and bigger companies can amortise their advertising costs over a larger asset base.
The next frontier for unit trusts, says Turpin, is the retirement fund market. Mutual funds (as collective investments or unit trusts are known in the US) are the main building blocks for the 401k employer-based defined contribution plans in the US as well as for individual retirement accounts and the Roth RAs, she says.
In the UK, a large chunk of unit trust sales come through individual savings accounts (ISAs) - the successor to personal equity plans (PEPs).
Unit trusts are already used in institutional retirement fund portfolios by, for example, m Cubed, and retail investors use unit trusts extensively in retirement annuities and investment-linked life annuities . A handful (though it is barely even that) of pension funds also offer different unit trusts in their individual investment choice offerings.
Under national treasury's retirement fund programme, employers who do not provide an occupational scheme will be forced to provide a payroll facility for retirement saving to their staff - Turpin says unit trusts are well placed to capture this market because of their high disclosure, cost effectiveness and portability.
But Turpin says the main attraction of using unit trusts is that they have been a successful vehicle in the retirement market overseas.
Coronation's head of personal investments Pieter Koekemoer says the bad publicity about life-based retirement savings vehicles such as RAs gives unit trusts the moral high ground. Regulators will be more attracted to the simplicity of unit trust charging structures than the opaque alternatives provided by the life industry.
