Collective Investment Schemes Explained

Published by
Lethabo Ntsoane

Collective Investment Schemes (CIS) are extremely popular in South Africa, with almost R3 trillion in CIS contributions originating from individual and institutional funds. There’s a good chance you’ve put your money into a collective investment scheme through a pension fund or another sort of investment vehicle.

Absa, Allan Gray, and others are prominent participants in South Africa. It is time for you to become well acquainted with collective investment schemes (CIS), their components, and the laws that regulate them in South Africa.

What is a Collective Investment Scheme?

A collective investment scheme is one in which two or more members of the public pool their money or other assets. Investments can be made in the form of bonds, securities, or cash. A fund owns the money or assets that have been jointly invested, and the fund is known as a portfolio.

Individuals can invest in a variety of assets through the fund. The assets are often reported to investors by the board of trustees from year to year, demonstrating how the money was employed during the year, as well as earnings from the monies invested.

Investment in a collective scheme is divided into units, and the amount of units owned by a fund is allocated to investors based on their contribution. As a result, each unit represents an individual’s ownership fraction of the entire fund’s assets.

Characteristics of a Collective Investment Schemes

  • It is a collection of people that come together and pool their money to invest in a variety of assets.
  • Individuals’ money is pooled and invested in a fund or portfolio.
  • The fund is valued in terms of total assets owned, as well as the number of units held by investors.
  • In South Africa, collective investment schemes are governed by the Collective Investment Schemes Control Act No. 45 of 2002.
  • Fund managers must be registered according to the requirements of the collective investment scheme act no. 45 of 2002.

Who Governs Collective Investment Schemes in South Africa?

The Collective Investment Schemes Control Act No. 45 of 2002 governs collective investment schemes in South Africa. The governing statute was enacted to empower the registrar of collective investment schemes, as well as to control and administer them.

The statute is under the authority of the Minister of Finance, and the CEO of the FSCA serves as a collective investment scheme registrar. As a result, the registrar is in charge of approving the managers and trustees of a collective investment scheme.

A collective investment scheme must have a manager, who must be registered with the registrar. A collective investment scheme must also appoint trustees or custodians, who are also required to register with the registrar.

The collective investment scheme manager is also in charge of appointing independent auditors. The appointed auditor is required by law to conduct themselves in accordance with the Act.

The Collective Investment Schemes Control Act addresses a wide range of issues concerning South African and foreign collective investment schemes. Knowing the scheme’s manager and board of trustees is critical since it can help determine if the scheme is legal or not.

How does a Collective Investment Scheme work?

A fund manager must be registered with the registrar or the FSCA to operate a collective investment scheme. The manager is then in charge of appointing the fund’s trustees or custodians. The trustees can be independent corporations with no financial interest or relationship to the fund. 

In addition, the trustee must be registered with the registrar and have an association license. The management and trustees’ association license is valid for one year and must be renewed each year. It expires on December 31st of each year.

Managers or management companies are in charge of raising capital by selling fund units to the general public. Management businesses can sell these units to investors through a distribution company or do it themselves.

The distribution or management company will be in charge of creating accounts for investors. A fund administrator can be hired, or fund administration can be handled in-house. Fund administration entails assessing the fund’s assets, estimating the value of fund units, and transferring ownership from one investor to another.

The results of the investments made throughout the year will be disclosed to investors. The report will contain all of the relevant information to assist an investor in making an informed decision. Information such as how the fund performed in comparison to the underlying benchmark, acquisitions, and so on will be communicated. 

Why Collective Investment Schemes are a good choice of investment

Investment in a collective investment scheme provides protection not just from fund custodians. Investments in a CIS have a beneficial consequence, and one notable example is the Allan Gray Equity Fund, which grows at a rate of 2.5 to 3.5 percent each year.

Here are some of the general reasons why individuals and businesses prefer CISs over other investments. 

Cost Efficiency

Because individuals come together to make an investment, the cost of administration per person becomes very low. Management costs start at zero percent and can reach as low as 0.05 percent per year.

Experienced Managers

The fund managers have extensive expertise and certifications in a variety of sectors. A CIS’s board of directors is made up of individuals with different backgrounds in law, engineering, commerce, science, and other fields.

Diversity in investments

Funds are invested in a diversified range of assets while adhering carefully to the investing plan. Investments can be made in stocks, bonds, commodities, and other available investment assets. Therefore, investors are somehow shielded from major economic shakedowns.

Low Risk

CISs are not as vulnerable as other types of investments, and they usually outperform the benchmark that they are tied to. Capital spent is not guaranteed, but historical performance can be used to forecast future earnings. Because the unit price fluctuates from day to day, it is best to consult with your financial advisor before making any withdrawals.

Conclusion

Collective Investment Schemes are one way for one to start investing. The lack of scheme management by investors can help amateur investors earn positive returns on investment by entrusting professionals with years of experience to make investment decisions on their behalf.

Lethabo Ntsoane

Lethabo Ntsoane holds a Bachelors Degree in Accounting from the University of South Africa. He is a Financial Product commentator at Rateweb. He is an expect financial product analyst with years of experience in reviewing products and offering commentary. Lethabo majors in financial news, reviews and financial tips. He can be contacted at lethabo@rateweb.co.za

Published by
Lethabo Ntsoane