My lessons on unit trust funds continues….. Last week I said that this week I was going to look at how and why the price of shares, and thus the value of unit trust funds, moves up and down and what effects them on a daily basis. However, I realised while composing this trilogy of teachings, (it might be longer than a trilogy – is there a word for that?) that a prelude to that lesson needs to be inserted here. So this week’s might become next week’s. Or the week’s after. Depends on how I arrange the episodes.

You will all see the name of some or other unit trust fund in your statements or schedules from me. You might see names like Marriott Worldwide or Essential Income Fund, you might see Allan Gray Equity or Coronation Balanced or Ninety One Managed or Sarasin Global Equity Fund. These are all Unit Trust Funds. A small fund will be a couple of billion Rand in size but a large one could be 100 billion Rand or even more. For all of you reading this, somewhere through these unit trust funds you actually own bits of all, or either of, Pick n Pay, Spar, Coca-Cola, Clicks, Netcare, Standard Bank, Absa, Woolworths, Microsoft, Johnson & Johnson and others like I mentioned last week. You all spend your money at somewhere that you own. That is a good thought.

The word Equity that you see in many unit trust names, really just means shares of companies. So an Equity fund will mainly own shares of companies, no property or bonds or (much) cash. However, by law every unit trust fund must hold a minimum of around 3% in cash. The reason for this is that they have to be able to pay out your withdrawal request within a set number of days and the only way to ensure that this can happen, is to have some cash in the fund. Otherwise you’ll moan at me that you cannot get your money out when you want to buy that motorbike that you shouldn’t really buy. They’ll pay you your withdrawal from the cash and then slowly sell whichever underlying shares they deem best to sell, to top up the cash portion of the fund again. If you own direct shares you can only get your withdrawal out when the stock broker finds a buyer for your shares. (You only get the money for selling your car when you find a buyer) But a Unit Trust Fund has to be able to pay you quickly.

Let’s look at what also actually happens. You ask me one day to help you get R100 out of your fund. But Bob comes along on the same day and asks me to help him add R200 into his fund, which happens to be the same unit trust fund that you are in. So on a net basis, on this day the behind-the-scenes-admin lady with the wide rimmed glasses, will only feed an extra R100 to the fund manager guys to trade into the stock market. Why? Because they took your R100 out of Bob’s R200 inflow instead of selling units in the fund. They still correctly adjust the number of units you own and of what Bob has just bought, but they don’t have to disrupt the fund, they are not forced to sell anything. The fund manager guys managing your unit trust funds actually have no idea who owns the units in the funds they manage. The behind-the-scenes-admin lady with the wide rimmed glasses records that info.

Next week we’ll look at shareholder meetings and that pricing up and down thing.

My next couple of newsletters are supposed to talk about what a Unit Trust Fund is, together with some interesting stuff on how they operate. So here goes part one.

In other parts of the world, these things are also called Mutual Funds, or Collective Investment Schemes. Mutual meaning many of us together, collective meaning we collectively invest in this thing. The name ‘Unit’ would refer to you and I owning units, or parts, of an investment fund. The use of the word ‘Trust’ is because all of these investment funds are governed, regulated, watched over, by independent Trustees. In SA we find that this is usually the Trustee department of one of the large Banks. For my examples through these mails, I am going to use Pick n Pay as the example of owning a listed company. But my thoughts would apply to any one of numerous other companies, whether that be in South African, or maybe Diageo in the UK, or Colgate-Palmolive in the US, or Nestle in Europe. (Just a by the way, these companies might be based on one country’s stock market, but they trade their product all over the world, because you might well have their whiskey and toothpaste and hot chocolate in your cupboards at home.)

The price of one PnP share yesterday ended the day at R59.38 per share, at 5.05pm. (Share prices of companies vary from small amounts like R20 to well over R1000, for just one share) Now with your and my debit order of only R300 per month, you would not be buying many shares with each payment and it would take a while for you to build up a spread of various companies. So some clever person once said, ‘why don’t we create a system/space/fund, that can pool everyone’s smaller pieces of money and then we can use that as enough money to go and buy many shares, and then those people giving us small bits of money can be given a small part of that whole big ‘collective’ investment fund, in the form of a proportionate number of units. Hence the average you and me can own a very small portion of many companies, through smaller parts.

Next week, I am going to look at how and why their price might move up and down and what effects them on a daily basis. This newsletter will get far too long if I try to cover it all today. And I don’t want you to get bored and close the email.