Unit trusts — formally known as collective investment schemes — are the building blocks of most South African investment portfolios. Whether you're investing through a retirement annuity, a tax-free savings account, or a standard investment account, there's a good chance your money is held in one or more unit trust funds.
Yet for many investors, the process of selecting funds feels opaque. With over 1,500 unit trust funds registered in South Africa, the choices can be overwhelming. In this guide, we demystify how unit trusts work, explain the different fund categories, and provide a practical framework for evaluating and comparing funds.
Key takeaways
- Unit trusts pool money from many investors to buy a diversified portfolio of assets
- Fund categories range from conservative (money market) to aggressive (equity)
- Total fees — not just the headline management fee — determine your net returns
- Past performance is a poor predictor of future returns; focus on process and consistency
- Your fund selection should align with your time horizon and risk tolerance
How unit trusts work
The concept is simple: a unit trust pools money from thousands of individual investors into a single fund. A professional fund manager then invests this pool according to the fund's stated mandate — which might be South African equities, global bonds, a balanced mix of asset classes, or any number of specific strategies.
When you invest in a unit trust, you purchase "units" in the fund. The price of each unit — called the net asset value (NAV) — is calculated daily by dividing the total value of the fund's assets by the number of units in issue. As the underlying investments increase in value, so does the NAV of your units. When they decline, your units are worth less.
The key advantage of unit trusts is diversification. Even with a relatively small investment (some funds accept minimums as low as R500 per month), you gain exposure to a portfolio that might contain dozens or even hundreds of individual securities. This diversification reduces the risk of any single investment materially impacting your overall portfolio.
Understanding fund categories
The Association for Savings and Investment South Africa (ASISA) classifies unit trusts into categories based on their investment mandate. Understanding these categories is the first step in selecting appropriate funds:
| Category | Typical allocation | Risk level | Suggested horizon |
|---|---|---|---|
| SA Money Market | Cash and near-cash instruments | Very low | 0-1 year |
| SA Interest Bearing | Government and corporate bonds | Low to moderate | 1-3 years |
| SA Multi-Asset Low Equity | Max 40% equity, rest in bonds/cash | Moderate | 3-5 years |
| SA Multi-Asset Medium Equity | Max 60% equity | Moderate to high | 5-7 years |
| SA Multi-Asset High Equity | Max 75% equity | High | 7+ years |
| SA Equity General | 80-100% SA equities | High | 7+ years |
| Global Equity General | 80-100% international equities | High (+ currency risk) | 7+ years |
The right category for you depends primarily on two factors: your investment time horizon and your ability to tolerate short-term losses. As a general rule, the longer your time horizon, the more equity exposure you can afford — because you have more time to recover from market downturns.
The fee landscape: what you're actually paying
Fees are the single most reliable predictor of long-term investment outcomes. Unlike returns — which are uncertain — fees are known in advance and compound relentlessly against your wealth. Understanding the full fee picture is essential.
Example: total cost of a typical balanced fund
A total cost of 2.42% might not sound like much, but its impact over time is substantial. On a R1 million investment earning a gross return of 10% per year over 20 years, the difference between a 1.5% total cost and a 2.5% total cost is approximately R700,000 in final wealth. That's the power of fee compounding.
The Total Expense Ratio (TER) is the standardised measure of a fund's internal costs, including the management fee, performance fee (if any), and other operating expenses. It does not include platform fees, advisor fees, or transaction costs. To get the full picture, look for the Total Investment Cost (TIC), which includes all layers.
Every 0.5% in fees that you can eliminate — without sacrificing quality of investment or advice — translates directly into additional wealth at retirement. Fee awareness is not about being cheap; it's about being efficient.
Active vs passive: the great debate
One of the most significant decisions in fund selection is whether to invest in actively managed funds or passive (index-tracking) funds.
Active funds employ fund managers who select individual securities, aiming to outperform a benchmark index. The pitch is that skilled stock-picking and market timing can add value above what the market delivers. Active fees typically range from 0.75% to 1.50% (plus potential performance fees).
Passive funds (ETFs and index trackers) simply replicate a market index — such as the FTSE/JSE Top 40 or the S&P 500. There's no stock-picking involved, so fees are much lower: typically 0.10% to 0.40%. The trade-off is that you'll never beat the index — you'll match it, minus the (small) fee.
The data is clear: over periods of 10 years or more, the majority of actively managed funds underperform their benchmark after fees. This doesn't mean all active managers are bad — some consistently add value — but identifying them in advance is extremely difficult. For most investors, a core allocation to passive funds supplemented by carefully selected active managers in specific areas represents a sensible approach.
A framework for fund selection
When evaluating a fund, we recommend considering five factors:
1. Mandate clarity. Does the fund have a clear, well-defined investment mandate? A fund that "does a bit of everything" makes it harder to understand what role it plays in your portfolio and how it will behave in different market conditions.
2. Fee competitiveness. Compare the fund's TER and TIC against peers in the same category. If a fund charges significantly more than alternatives, there should be a compelling reason — such as a demonstrably superior track record or access to a unique strategy.
3. Consistency of returns. Rather than looking at the single best-performing fund over the last year, examine rolling three- and five-year returns. A fund that consistently delivers above-median returns with below-average volatility is more attractive than one that had a single spectacular year.
4. Risk management. How did the fund perform during market downturns? A fund that captures most of the upside while limiting downside losses will compound wealth more effectively over time than one with extreme highs and lows.
5. Manager stability. Has the fund manager been in place for a meaningful period? Frequent manager changes can disrupt investment strategy and make historical track records less relevant.
Putting it together
Fund selection is both an art and a science. While the principles above provide a robust framework, the practical application — selecting the right combination of funds, determining appropriate allocations, and rebalancing over time — benefits significantly from professional guidance.
At Harbour Wealth, our investment team conducts ongoing due diligence on hundreds of funds across multiple providers. We construct portfolios that align fees with value, balance risk with return potential, and adapt to changing market conditions and client circumstances.
If you'd like a review of your current fund holdings or guidance on constructing an appropriate portfolio, contact your advisor.