The SA unit trust industry represents just 0,4% of worldwide mutual fund assets. According to the Investment Company Institute, which measures assets internationally, there are US$17,7 trillion of mutual fund assets around the world.

The US accounts for just over half of this (though just 14% when it comes to the number of funds in existence).

SA's $65,6bn, though, is quite respectable, and is ahead of Taiwan ($57,3bn) and Mexico ($47,2bn) - it was less than half the size of both of these back in 2001.

Though in SA there are very limited inflows into equity funds, they still account for the bulk of inflows into the global industry, accounting for 57% of new money in the fourth quarter of 2005. Equity funds still account for 47% of mutual fund industry assets worldwide, and money market funds for 19%. The SA industry is much more conservative, with a 31% allocation to equity funds and 30% to money market funds.

Multi-asset funds, which dominate the flows into the SA industry, accounting for more than half the flows in a typical quarter, account for just 12% on international flows.

One of the reasons for the total dominance of asset allocation funds has been the phenomenal rise of third party, or broker, funds. These have taken over from the old wrap funds. Because of the way capital gains tax (CGT) is charged - trades within a unit trust are CGT-exempt - it is more efficient for brokers to house their investments within a unit trust.

Tienie van der Mescht, MD of Sanlam Collective Investments, says the current distribution model is not sustainable as there is too long a chain. The investor uses an adviser, who then invests with a linked product provider, which then invests with a unit trust management company.

A broker fund can shorten the chain, as it can invest directly into unit trusts, cutting out the linked product provider's fees and the unit trust management company fees. The broker pays a nominal fee to the unit trust management company that hosts his funds and takes care of compliance, and then pays the unit trust manager institutional-type fees of, say, 0,4%.

Van der Mescht says that by carrying out white-label arrangements, unit trust companies are in effect creating their own competitors, "but many brokers want ownership of their products and it is better to get them into the system, in the regulated unit trust environment, than to make them move to unregulated products. Wrap funds were unregulated, so the move to broker funds must be good news."

Van der Mescht says it will not be too long before brokers introduce their own retirement annuities, living annuities and preservation funds under their own brands.

Almost a third of the funds on the market are broker funds, though they account for just 11% of industry assets.

Sanlam is the largest third-party fund provider by assets, with R11,8bn under management. But Van der Mescht says it aims to minimise its reputation risk by dealing only with organisations of substance. It hosts more than R4bn of Citadel's funds and R1bn from Advanced Wealth Management. Metropolitan has been the most aggressive and it has 77 broker funds with assets of R7,9bn - it accounts for more than two-thirds of their unit trust assets.

Cynics might argue that it had no choice, as the poor performance of Metropolitan's in-house funds meant that Metropolitan unit trusts would remain subscale if it did not diversify. Not all of these funds are broker funds, though. It is also hosting boutique fund managers such as Rhett Hammond's Ankh, Willie Jonker's Interneuron and Cadiz, which has launched two absolute return funds, the Inflation Plus and the Equity Ladder.

John Kinsley, MD of Prudential unit trusts, says there is a definite polarisation between brokers who want to keep control of investment management, as a way of earning higher product fees, and financial planners who want to subcontract the investment decision-making and concentrate on giving their clients a financial needs analysis and helping them with issues such as tax planning. This has led to the growth of businesses which offer a holistic planning solution, such as Acsis and Exchange Solutions.

"But as a result of both trends, the linked product providers have become a less important source of business for unit trust managers - this quarter they accounted for 40% of inflows, down from 60% two years ago," says Kinsley. There has also been a substantial revival of direct business as Allan Gray, and most recently Coronation, have set up their own retirement annuities and preservation funds. These are sold directly to consumers who want to avoid paying commission to brokers, and they are happy to put their assets into a fund such as Allan Gray Balanced or Coronation Balanced Plus, in which the asset managers make all the important investment decisions on their behalf.

There are now 617 rand-denominated unit trusts and more than 400 foreign collective investment schemes registered for sale in SA. But there is a significant crisis facing the Foreign Collective Investment Schemes.

The majority of these are domiciled in the European Union (typically Luxembourg or Ireland). But SA's Financial Services Board has become extremely nervous about the new standard for funds registered in the EU, known as Ucits III. (Ucits stands for Undertakings for Collective Investment in Transferable Securities.) This allows much greater use of hedging and derivatives than previously - and certainly a great deal more than the FSB permits in domestic funds.

The EU regulators will not allow anybody to use derivatives indiscriminately, as funds need to submit a risk management process for approval that monitors, measures and manages the risks.

But funds that become compliant with Ucits III will immediately fall foul of the current Collective Investment Schemes legislation, and risk having their local accreditation either withdrawn or suspended.

The Association of Collective Investments is negotiating with the FSB to find a way forward, but, of course, it was because of pressure from the local unit trust industry that the cumbersome system of foreign fund approval was set up in the first place.

Many foreign managers, however, have found the whole process of registering in SA too much of a hassle: there are more lucrative territories in which they can market where the regulator is more welcoming.

Perhaps as the collective wisdom of regulators all over Europe has gone into the legislation, we should adopt similar legislation. It would make sense to harmonise our regulations with international best practice.