The Collective Investment Schemes Control Act (Cisca) provides for the regulator of the schemes – the Financial Sector Conduct Authority – to put in place some restrictions for unit trust funds investments in securities.
The aim of these restrictions is to protect you from the risk that comes with too great a concentration in a single share and high concentrations in unlisted shares.
These limits can be found in a notice issued by the Financial Sector Conduct Authority (formerly the Financial Services Board) in terms of the Act (Board Notice 90). Some examples of the restrictions are that:
- Funds are not allowed to invest more than 10% of the fund in the shares of unlisted companies.
- A fund may only invest up to 5% of the fund in a listed share with a market capitalisation (number of shares multiplied by the price) of less than R2 billion.
- A fund may only invest up to 10% of the fund in a listed share with a market capitalisation of R2 billion or more.
- Funds are only allowed to hold up to a 5% shareholding in a listed company with a market capitalisation of less than R2 billion.
- Funds are only allowed to hold up to 10% shareholding in a listed company with a market capitalisation of R2 billion or more.
- Managers may not hold more than a 15% shareholding in a company in the group to which the manager belongs and no more than 24% in such a company across all the manager’s funds.
- Funds can hold higher weightings of a share when it is in the fund’s benchmark, with different limits applying when the index represents a market (like the JSE) or a subset of a market (like the financial sector of the JSE).
- Funds may not borrow money to invest – as it introduces more risk. This is something that hedge fund managers are, however, allowed to do.
- Funds may not short the market (use derivatives to sell shares they do not own). This is also something that hedge fund managers are allowed to do. Your unit trust manager can, however, use derivatives to hedge their portfolios – for example, selling futures or buying options in anticipation of a fall or rise in the stock market.
- Funds may invest in mutual funds in other countries even if those funds are not approved as foreign funds that can be marketed in South Africa, as long as those investments were not solicited in South Africa.
Board Notice 90 under CISCA
