THE FINANCIAL SERVICES BOARD
COLLECTIVE INVESTMENT SCHEMES
T
here are different ways in which people can invest their hard-earned money.
Collective investment schemes offer a means for ordinary people to invest on
the stock exchange. In this way, they can potentially get good returns on their
investment and beat inflation.
What are the disadvantages associated
with investing in Collective Investment
Schemes?
What is a Collective Investment Scheme?
• CIS’s are seen as medium to long-term investments. Investors therefore should
not expect to make a profit in the short-term;
• All investments in securities, including CIS’s, run the risk that the markets may
collapse and that investors may lose money;
• A CIS that leans heavily towards one sector may be negatively affected by
adverse economic changes in that sector;
• CIS charges have been deregulated and costs may differ from one CIS Manager
to the other;
• Cost for giving advice by financial advisors can be built into the fund and can
diminish the returns, especially if charged as an ongoing percentage of the
fund;
• CIS are becoming very complicated and therefore require the investor to take
great care in ensuring that the scheme meets their specific needs and risk
profiles.
A collective investment scheme (“CIS”) can be described as an investment product
that allows many different investors to pool their money into a portfolio. Unit trusts
were the first collective investment scheme to be offered to investors in South
Africa. It is still the most popular and widely available form of CIS in the country.
The word “unit’ refers to the portion of the CIS portfolio that is shared by the
investor. Each investor has a proportional stake in the CIS portfolio based on how
much was contributed. Collective investment schemes are suitable for investors
with little funds and who may not have the time, money or expertise to make the
investments themselves. A CIS therefore enables smaller investors to gain exposure
to the financial markets, which they would otherwise be precluded from accessing
in their individual capacity.
Which investment classes make up a
Collective Investment Scheme portfolio?
A collective investment scheme consists of different portfolios which are generally
made up of different asset classes, namely money markets, bonds, equities and
property. A CIS can therefore be complex in nature, given the fact that there are
many types of collective investment schemes. This might be overwhelming to the
investor who lacks the necessary knowledge to manage his or her investment
portfolio.
Who manages a CIS portfolio on behalf of
the investors?
The assets of a collective investment scheme are managed by a registered CIS
Manager. CIS Managers need to be registered with the Financial Services Board (FSB)
in terms of the Collective Investment Schemes Control Act (Act 45 of 2002). Each
CIS must be approved by and registered with the Registrar of Collective Investment
Schemes at the FSB and comply with the Collective Investment Schemes Control Act
(“CISCA”) (Act 45 of 2002). It is the duty of the CIS Manager to appoint an auditor,
who is registered under the Public Accountants’ and Auditors’ Act of 1951, to audit
the business of the CIS.
What are the advantages of investing in
Collective Investment Schemes?
• They allow ordinary people to invest in shares that would normally be out of their
financial reach had their monies not been pooled with that of other investors;
• A CIS reduces the investment risk through diversification. It enables individuals
to invest in a broad range of securities. This diversification provides protection
against isolated volatility in a particular sector or asset class;
• They offer a means of beating inflation as returns can be higher than the inflation
rate;
• A CIS is a flexible form of investment as you can either invest a lump sum or
make a regular monthly investment;
• A CIS offers liquidity. This means that an investor may choose to cash in a portion
of the CIS or all of it at any given time as funds are always accessible. This is not
always the case with long-term insurance;
• You can monitor the performance of your CIS portfolio as it appears daily in the
business reports of newspapers;
• Professionals in the field of collective investment schemes invest your money on
your behalf;
• Pooling money with that of others gives the advantage of buying in bulk, making
dealing costs reasonable; and
• You can choose a CIS that meets your needs.
What are the different kinds of Collective
Investment Schemes available in the
market?
There are basically five types of collective investment schemes from which
an investor can choose, namely:
1) CIS in securities – the portfolio consists mainly of securities and includes local
funds registered with the FSB. Most collective investment schemes fall in this
category.
2) CIS in properties – the portfolio consists mostly of property shares or direct
property.
3) CIS in participatory bonds – the scheme consists mostly of participatory
bonds.
4) Declared CIS – this is a scheme declared by the Minister of Finance as a CIS.
5) Foreign CIS – these are foreign schemes which solicit investments from South
Africans. In terms of the CISCA, a foreign CIS must apply to the Registrar of CIS
to be approved and registered.
Know your terminology before investing in
a CIS!
Money markets – investments that provide monthly income through interest in the
short-term and have a term of less than one year. These funds have a very low risk
with very little volatility.
Bonds – medium to long-term investments with a maturity term of between 3 to 20
years. Bonds offer guaranteed income in the form of coupons, and the capital value
rises and falls in response to changes in interest rates over time.
Inflation –the cause of increases in the prices of the things we buy. In order to make
our money grow, we need to invest in portfolios that will earn interest that is higher
than the inflation rate.
Equities – provide investors with ownership in a company. Equities are volatile in the
short-term and are therefore considered to be more long-term investments in order
to lessen the risk over time. Income is paid in the form of dividends, and capital
growth can occur if the share is sold for more than it was bought for.
Property – tangible type of investment that is immovable, which make it “less liquid”
than other asset classes. Property provides investors with a regular income in the
form of rental income. There is a potential for capital growth if the property is sold
for more than it was bought for.
Participatory bonds – are mortgage bonds over immovable property, through which
the investor receives regular interest. A participatory bond has a minimum investment
term of 5 years after which one needs to give 3 months’ notice to disinvest.
Important contacts details you may need when investing in a CIS:
Registrar of Collective Investment Schemes
The Financial Services Board (FSB)
PO Box 35655, MENLO PARK, 0102
Physical address: Riverwalk Office Park, Block B,
41 Matroosberg Road, Ashlea Gardens Ext 6, MENLO PARK, 0081
Toll-free: 0800 20 20 87 or 0800 11 04 43
E-mail: info@fsb.co.za
Website: www.fsb.co.za
The Association of Savings and Investment SA (ASISA)
PO Box 413255
Craighall
2024
Tel: (011) 325 6223
Fax (011) 325 6160
PO Box 23525
Claremont
7735
Tel: (021) 673 1620
This article is funded by the Financial Services Consumer Education Foundation in the interests of financial literacy
MG0005
The Ombud for Financial Services Providers (FAIS Ombud)
Tel: 0860 324 766
Fax: (011) 348 3447
E-mail: info@faisombud.co.za