Collective Investment Schemes Control Bill: briefing

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Finance Standing Committee

12 August 2002
Chairperson: Ms B Hogan (ANC)
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Meeting Summary

The discussion on the presentation by the National Treasury focused on the structure and components of the collective investment scheme, with special reference to the roles and duties of the trustee, the fund manager and the investors, as well as the measures put in place to ensure the manager operates the fund in the best interests of the investor. Concern was expressed as to whether the Bill actually makes such schemes more accessible to the general public as a viable savings structure. The incidences and examples of the types of fraud and malpractice which the creation of the trustee position seeks to avoid was also discussed.

The discussion on the first portion of the FSB presentation raised concern with the reason for the exclusion of in-house incentive schemes and stokvels from the ambit of Bill, and whether these should not be included in the Bill, perhaps via the exemptions and conditions in Clause 22.

Meeting report

The Chair stated that she had been informed by the JSE at 19:30pm the previous evening of its intention to present a submission on the Bill. She wanted to know why JSE wanted to make a submission on the Bill.

Mr Rob Barrow, Deputy Executive Officer: Investment Institutions of the Financial Services Board (FSB), replied that the JSE seeks to house its SATRIX product within the framework of the Bill. The JSE is experiencing certain tax problems in implementing its product, and realises that these could be solved by using the Bill. It does seem that their concerns could be accommodated by the Bill without effecting amendments at this stage of proceedings, and it would not be prudent to entertain any amendments to the Bill at this late stage if only to accommodate JSE's one product.

Briefing by National Treasury
Ms Samantha Anderson, Director: Financial Regulation of the National Treasury, conducted the presentation and discussed the overview of the Bill, the nature of a collective investment scheme, the history of collective investment schemes in South Africa, the profile of the collective investment schemes industry with regard to both institutions and investors, the prudential and other measures employed by the Bill to ensure investor protection, the structure of the collective investment scheme and the interface with other investor protection measures.

She also provided Members with examples of the various names and types of collective investment scheme funds currently registered and operating within the Republic. She referred Members to the List of Management Companies of Unit Trust Schemes. She then read the underlined sections of the article on performance of CIS Funds in Cover, August 2002.

Discussion
The Chair requested further clarity on the slide entitled "Scheme Structure".

Ms Anderson stated that the trustee is the chief operator of the accounts of the scheme.

Ms R Joemat (ANC) asked who precisely advises the trustees with regard to the operation of the scheme, and which party would bear the loss that could occur if bad advice is furnished and acted upon.

Mr Barrow replied that the trustee does decide how the investor's money would be committed, not at all, and the role is thus fundamentally different to that of a custodian of a pension fund. The sole responsibility of a trustee under the Bill is to ensure that the assets of the fund and those of the investor remain segregated at all times, and thus functions essentially as a watchdog over the operations of the manager of the scheme. The decision properly lies with the scheme operator as this person decides how the investment will be channeled, and could in turn be advised by its own financial officer/s. The trustee is not part of the inner workings of the scheme and ensures that the scheme operator does not touch the investment at all, and the investment is therefore handed directly to the trustee by the investor. The trustee does however ensure that the decisions taken by the scheme operator are in line with the objectives of the scheme.

Ms R Taljaard (DP) questioned whether the trustee is then analogous to a board member, save for the fact that the trustee is more involved with the day-to-day reconciliation of the accounts and financial affairs of the scheme with the result that the trustee's role is more active than a board member.

Mr Barrow replied that the custodian or trustee functions at an operational level, and has to ensure the day-to-day reconciliation of financial matters.

Ms Taljaard noted that it was mentioned during the presentation that the trustee of the scheme is usually a body independent from the scheme group and, in view of the statement made regarding the concentrated number of institutions involved in this field, is the continued independence of the trustees in a market that is highly concentrated not a cause for concern?

Mr Barrow responded that there are presently only four major banking groups involved in this aspect, each exercising its own custodial function. The FSB is satisfied that this number is adequate to ensure independence of the trustees, and the introduction of new institutions providing this service is encouraged. A significant disincentive for such emerging institutions is the fact that the burden is onerous, and the body would have to bear much risk in the venture.

Mr D Hanekom (ANC) asked whether the trustees would be employed on a full time basis.

Mr Barrow answered in the affirmative.

Mr Hanekom stated that the diagram on the "Scheme Structure" slide confuses matters with regard to the watchdog and operational roles of the trustee.

Furthermore, Ms Anderson had mentioned during the presentation that the investor chooses the specific portfolio in which to invest funds. Yet this does not clearly reflect how this affects the role of the fund manager, who has to invest the funds as wisely as possible.

The Chair asked whether the "portfolio" referred to on that slide actually refers to the various funds offered by the scheme with the result that, conceptually, a single scheme could consist of several independent funds, each managed by a separate fund manager.

Mr Barrow replied that this is not necessarily the case, but could occur in theory.

Mr Hanekom asked whether this means that the investor chooses the fund in which to invest.

Ms Anderson replied that they do choose the fund, but not the assets underlying that particular fund.

The Chair contended that this structure is not as open-ended as it may appear, because the registered title of each fund provides the potential investor with a description of each fund and its underlying assets, so that the investor might be made aware of the underlying assets of that fund.

Mr Barrow responded that the investment portfolio of the fund could be widely or narrowly framed, and the trustee would not be involved here. The trustee would, however, be put on alert and called into action when the manager decides, for example, to invest Pick 'n Pay stock into gold funds. In the event of this discrepancy occurring, the trustee would exercise its oversight function as the manager is not investing the funds in accordance with the investment objectives of the scheme. Conversely, as long as the manager decides to channel the investment into gold stocks, the trustee would not be placed on alert.

Ms Taljaard referred to Ms Anderson's statement that the risk factor is an important consideration here, and asked whether the trustee would be the primary arbiter in this regard.

Mr Barrow replied that this is not the duty of the trustee of the scheme as this is done by the fund manager, as long as the latter invests funds in accordance with the trust deed.

The Chair suggested that the situation resembles that of a husband-wife relationship in times gone by, in which the husband would merely make the money available and the wife would decide on which items it would be spent. Thus the trustee would not decide on the manner in which the funds would be invested and which assets would be committed.

Furthermore, why would it not be possible, as mentioned in the presentation, for a scheme to be declared bankrupt?

Mr Barrow replied that such funds, by their very nature, could only be reduced to zero.

The Chair asked whether the trustee would then be put on alert should the fund either be managed badly or approaching zero.

Mr Barrow answered in the negative.

The Chair then requested clarity as to the actual role of the trustee.

Mr Barrow replied that the primary duty of the trustee is to ensure that the assets of the investor and manager are always segregated by holding the fund's assets in his (the trustee's) own name. The result would be that in the event of the manager being declared insolvent, his assets and those of the investors will not be co-mingled.

The Executive Vice Chairperson of the Association of Unit Trusts reminded Members that the investment mandate of the scheme is clearly contained in its trust deed, and this document will inform the trustee as to exactly what can and cannot be done. All the activities of the scheme will then be monitored for compliance with the trust deed.

Mr Barrow added that a slight amendment could be made to the "Scheme Structure" slide with regard to the relationship of both the manager and trustee to the trust deed, as the deed properly relates to the manager, trustee and investor of the scheme.

Ms S Ngodi (ANC) referred to the slide dealing with the profile of South African investors in collective investment schemes, and stated that an important concern that has to be addressed here is the transformation of the national economy so that the previously disadvantaged especially can benefit from such investment schemes. It seemed that this industry consists primarily of retailers which benefit from collective investment schemes. It is not clear if the Bill seeks to grant those without the necessary knowledge, the opportunity to invest in such schemes, and this refers especially to the small banks that would become increasingly involved here. Is the Bill instead attempting to maintain the status quo by allowing the scheme operators of the major banking players to create more portfolios to benefit only the select few?

Ms Anderson replied that this matter does not only present a problem for the collective investment schemes industry but also for the insurance, banking, investment advisory fields and financial services industry generally. Opportunities to invest in collective investment schemes have, traditionally, been offered exclusively to wealthy white South Africans, and efforts are continually being made to make such services more accessible to the general public.

The industry has itself devised certain criteria for investment in such schemes with regard to the minimum lump sum and initial payments to be made as well as the minimum monthly installments, depending on the particular scheme. These figures reflect that the minimum investment is approximately R200 per month, which might not be accessible to all but to most. The minimum lump sum payment stands at R1 000 to R5 000 per month, which could be a barrier to the lower income earners. The industry has to reconsider these amounts with regard to its target market and the accessibility threshold.

These funds are often viewed as a long tem benefit, and possible competition for the pension funds industry.

The Chair stated that the recent trend seems to be towards a greater representation of institutional investors rather than retail investors, and this contradicts the statement to the contrary on the slide dealing with the profile of investors.

The Association of Unit Trusts executive vice-chair, Ms D Turpin, suggested that the possible cause of confusion here is the broad use of the term "institutional investor" to include both institutional and retail investors.

Mr Barrow stated that where pension funds hold collective investment schemes, they usually do so with the intention to secure a return on the investment to the members of the pension fund. The business of that fund is then linked directly to its performance, whereas one hundred percent of the time the man in the street invests in a collective investment scheme.

The Chair accepted this point, but contended that the investment is almost made via an intermediary. Furthermore, clarity is requested regarding the risk profile of the industry, as the possibility of making a loss on investments is a huge disincentive for potential investors in this market. This is even more significant to those who do not have surplus money to commit via investments.

Ms D Turpin informed Members that there are companies that currently offer a monthly fee of R50 for such schemes, and this threshold is thus determined by market demand. It is hoped that this net is expanded so that this service can be made accessible to the general public.

Furthermore, these schemes also need to be made accessible to persons who want to be scheme operators, as stated earlier by Ms Nqodi. A hosting service is currently being offered to emerging companies involved in this sphere. A prime example would be the Oasis Asset Management Group, which operated under the guidance and support of a mentor company that equipped it with the necessary skills to enable it to launch its own management company and function independently.

Ms Taljaard referred to Ms Anderson's statement that the trust deed is essentially a contractual obligation between the relevant parties. How would possible amendments to this instrument with regard to the investment objectives and performance of the fund be negotiated?

Mr Barrow replied that any proposed amendments to the trust deed must first be approved by the FSB, and even then it cannot be amended in any manner that could adversely prejudice investors. Should any amendments be proposed to the investment mandate of the fund, the investors have to be put to a ballot and decide on the outcome.

Ms Anderson added that Clause 70 of the Bill details the duties of the trustee.

Ms Taljaard requested that Members be provided with a copy of a typical trust deed.

Ms Turpin replied that this will be made available to Members.

The Chair asked whether, since such schemes have been operating since the 1860s, any incidences have been reported in which the fund manager has transferred the investor's funds directly into his/her own account, or whether any other incidences of fraud have been reported. In other words, what precisely are the types of malpractices, abuses or fraud the segregation of assets aims to avoid.

Mr Barrow replied that the aim is to avoid the possible co-mingling of the assets of the fund manager and its investors should the former become liquidated. The Bill does not seek to address cases of pure bad luck or bad management, but rather seeks to avoid cases of actual fraud. These include cases in which the manager had the ability to access the investors' funds and proceeded to abuse this access, and thus pertains to fraud in properly structured schemes.

Ms Joemat asked to what extent the Bill protects investors against pyramid schemes.

Ms Anderson replied that this matter will be dealt with at a later stage of the discussion.

The Chair referred to the slide entitled "Liquidity Provisions", and contended that both the liquidity and borrowing provisions would be relevant to instances in which the fund "runs on".

Ms Nqodi requested clarity on the terms "futures" and "derivatives".

Mr Barrow informed Ms Nqodi that futures are types of derivatives.

Mr N Nene (ANC) contended that the investors seem to be at the mercy of their financial advisors with regard to the degree of disclosure of information on the fund.

Ms Anderson replied that Clause 3 of the Bill details the duty to disclose where no intermediary is involved, and Clause 93 deals with the permissible deductions from a portfolio which have to be disclosed.

Ms Taljaard questioned whether, in terms of broader reform, all interested parties are satisfied that the existing disclosure requirements including those in the Companies Act also apply to collective investment schemes. Is the FSB satisfied that the disclosure requirements contained in the Bill adequately protect the investor?

Mr Barrow responded that this industry is well ahead of any other in the country, and has been favourably compared to the Global International Performance Standards. The industry is a leading example of disclosure practices and standards.

A representative from Sonnenberg Attorneys referred to the second last slide of the presentation and asked whether the provisions of the Bill apply equally to fund managers operating from abroad.

Mr Barrow replied that the Bill would apply to them in the same way as it does to those fund managers operating nationally. The trustees could also appoint a subtrustee in that foreign country to ensure that those fund managers abide by the legislation.

The representative from Sonnenberg asked whether this means that the local trustee would be held primarily responsible.

Mr Barrow answered in the affirmative.

Ms Taljaard asked whether the trustee would have any part to play in the "hiring and firing" of the fund manager.

Mr Barrow replied that they have no role here whatsoever, as the scheme operator generally employs its own in-house investment manager to manage the portfolios. The confusion caused here could be resolved by referring to them as custodians rather than trustees in the pension funds sense, as they are only referred to as trustees because the Bill deal with unit trusts.

Briefing by the Financial Services Board
Mr Barrow discussed the first part of the presentation dealing with the scope and legislative history of the Bill, and informed Members that the Bill covers the following four institutional schemes: schemes in securities or equity unit trusts, foreign schemes, schemes in property or "PUTS" and schemes in participation bonds.

The unit trust industry is the only of its kind that is able to provide its investors with accurate information regarding their investment and the latest financial position at the end of every business day. Yet this could count against the industry because it is too transparent. The role of the Bill is to ensure both that investors are given the opportunity to invest their money and that they are treated fairly.

As far as foreign schemes are concerned, as outlined on the first slide entitled "Scope of the CISC Bill", collective investment funds are popular in the tax havens where the home regulatory environment is lacking stringent control. Model examples of such havens are the Channel Islands and Cayman Islands, which have both sought to create a fund industry which has to date been phenomenally successful. A similar approach has been adopted by Ireland, but because it is not a separate island instead declared a section of Dublin a tax haven. Before South Africa could begin to work with those countries, it has to be certain that their home regulatory environment is in line with international standards.

The Chair suggested that the remainder of the briefing be continued during the next meeting of this Committee, as not enough time was left to discuss properly the important matters contained in the remainder of the presentation.

Discussion
Ms L Mabe (ANC) referred to the statement made by Mr Barrow during the presentation that the SAB in-house employee incentive scheme is beyond the ambit of the Bill because it cannot be categorised as a collective investment scheme, and requested further clarity as to the reason for this position.

Mr Barrow replied that it cannot be regarded as a scheme under the Bill because it is an in-house arrangement, and only applies to SAB employees.

Ms Mabe contended that it is not dissimilar to a scheme under the Bill because the SAB employees together form a collective, and therefore constitute a collective investment scheme as envisaged under the Bill.

Mr Barrow disagreed, as it is merely an in-house scheme and is not an offer to the general public, and therefore does not fall within the ambit of the Bill.

The Chair sought to clarify matters by suggesting that it is similar to an employee share incentive scheme.

Mr B Mnguni (ANC) contended that Clause 1(b) of the Bill does not seem to afford the investors as much protection against overzealous fund managers. The position with regard to the specialised investment advisors is unclear.

Mr Barrow replied that the Bill does not seek to protect investors from the competence of their investment advisors, because they have themselves selected their advisor and run the risk attached to such a decision and investment. These advisors and managers are however required to operate above board and administer the investment in the best interest of the investor. He reminded them of the opening statement of the presentation - that investors participate in the risks as well as the gains of the scheme and the rewards of the market.

The specialist advisors would be regulated by the Financial Advisory and Intermediary Services Bill currently being deliberated in Parliament.

Mr Mnguni suggested that an ordinary director would have to be held liable should s/he trade recklessly while also mindful of the fact that this would lead to the death of the fund. Yet the same does not apply to fund managers under the Bill.

Mr Barrow responded that the manager could face both criminal and civil action if acting not only with negligence but also with gross negligence. It is only in extreme cases of reckless trading or fraud that such action would be taken, because the trustee position serves to guard against this.

Mr M Mahlangu (ANC) referred to the slide entitled "Scope of the CISC Bill" dealing with Clause 22, and requested Mr Barrow to explain the circumstances in which the registrar could refuse to register a scheme.

Mr Barrow replied that the Bill provides that this may be done if the registrar believes the scheme is not in the public interest or is not fit and proper to be registered.

Mr Mhlangu asked whether the registrar would then advise them to pursue another scheme instead even if the potential investors themselves are convinced that the scheme is sound, as was the case with the recent Millennium 2000 pyramid scheme.

Mr Barrow responded that the Bill does not regulate pyramid schemes, such as the Millennium 2000 scheme, as these are governed by the banking legislation. Pyramid schemes would, in theory, be stopped before they are allowed to generate funds illegally. Those that are currently operating would be shut down, and the fraudulent managers would be forced to refund the investors of that scheme.

Ms Taljaard requested clarity regarding the scope and extent of the exemption provided for in Clause 22 of the Bill, as well as an indication of the number of in-house schemes currently in operation. Furthermore, are there any guidelines that serve to protect investors as well?

Mr Barrow said that there are only three such in-house schemes currently in operation, which indicates how rare and exceptional they are. Clause 22 now allows certain types of schemes to be exempted subject to certain conditions. In the case of the SAB in-house scheme this would mean that that scheme would be exempted by Clause 22 as long as it is only offered to employees of SAB, reports to the FSB regularly on its financial situation and confirms that it continues to operate within those confines.

Stokvels could be considered collective investment schemes but do not fall within the ambit of the Bill as long as they do not comply with the "general public" requirement. The definition of "general public" is strongly worded in the Bill, and as long as they operate on the basis of a domestic relationship between the investors in the stokvel, it will not be regulated by the Bill.

Ms Taljaard contended that by this logic, the same position could be adopted with regard to stokvels as was done to the SAB in-house scheme, as outlined by Mr Barrow. Conditions could also then be applied to stokvels via the exemption in Clause 22, so as to grant protection to investors in the stokvels as well.

Mr Barrow replied that any attempts to register stokvels would cause huge problems as this would contravene a policy directive issued by the Policy Board that stokvels should not be interfered with. The primary reason for this decision is the domestic relationship enjoyed by its investors, and any attempts to regulate is would cause chaos. It could be debated whether the Bill should be extended to include stokvels as well.

Ms Nqodi suggested that the definition of "general public" then be amended.

Mr Barrow stated that the last portion of the current definition of "members of the public" in Clause 1 of the Bill expressly excludes stokvels.

Ms Anderson added that similar problems are being experienced by informal banking institutions, such as the community banks, because their capacity does not match that of their larger and established counterparts. The same applies to stokvels as the requirements of the Bill are so onerous for them that they would no longer be able to exist, should they be brought within the ambit of the Bill. The Treasury is evaluating a possible third tier of banking, and the same should be done here with regard to stokvels. Thus appropriate mechanisms should be implemented to regulate stokvels.

Ms Nqodi contended that part (a) of the definition of "members of the public" is ambiguous, as this could be interpreted to include stokvels.

Mr Hanekom suggested that the last portion of that definition expressly excludes stokvels.

Ms Taljaard asked whether any constitutional challenge could be brought via Section 9 of the Constitution against the exclusion of stokvels from the Bill.

The Chair contended that it would be too difficult to include stokvels, as they are fundamentally different to collective investment schemes as envisaged by the Bill. Stokvel investors are able to identify each other because of the domestic relationship they share, whereas collective investment schemes involve anonymous participation by its investors. Furthermore, investors in stokvels have not consulted investment managers, with the result that the chances of fraud occurring are slim because of the nature of the domestic agreement and might therefore not need regulation that urgently. It would thus seem that the exclusion of stokvels cannot be challenged constitutionally because they are so different to collective investment schemes.

Mr Barrow suggested that the phrase "which can properly regarded" in the definition does create scope for a constitutional challenge. Pyramid schemes are not similar in nature to stokvels because the former involves the general public, whereas the latter is social in nature.

The Chair stated that pyramid schemes are deposit-taking institutions and would therefore surely fall under the banking regulatory structure.

Mr Barrow agreed to an extent, but hesitated to agree completely because some pyramid schemes are purely investment based. These would clearly offend against the Bill as well as the Banks Act because it is a deposit-taking institution. It would probably be more appropriate for the banking legislation to regulate pyramid schemes.

The Chair asked whether the FSB reports pyramid schemes to the banking industry's regulatory structure.

Mr Barrow answered in the affirmative.

The Chair asked whether the registrar exercises a discretion with regard to the action to be taken against hedge funds.

Mr Barrow replied that this is the case, and informed Members that the Advisory Committee is the relevant adjudicating body, in terms of Clause 46.

The Chair requested Mr Barrow to explain whether any incidences have actually been reported in which investors have been put to a ballot to petition against an increase in scheme fees, as it is hard to believe that investors would want to pay more.

Mr Barrow responded that this has happened where a fund manager intended employing the services of an expensive foreign consultant, and wanted to increase the fees to be paid by investors to cover this cost. The investors had decided against the increase.

Ms Taljaard requested clarity on the figures regarding the foreign collective investment schemes currently in operation, and the extent to which foreign hedge funds favour South Africa.

Mr Barrow responded that as of June 2002 such schemes generated R88,6 billion.

There were no further questions or comments and the meeting was adjourned.

Appendix:
UNIT TRUST DELIVER MIXED RESULTS DURING SECOND QUARTER - COVER MAGAZINE, AUGUST 2002

Much beleaguered unit trust investor
were faced with a mixed bag of performances during the second quarter of this year. Domestic unit trusts achieved positive returns, but rand-denominated foreign funds were negatively affected by both the decline in international markets and the strengthening of the rand. The rand has regained 16,7% of its value against the US dollar since 31 December 2001, resulting in a negative return (currency loss) on rand-denominated foreign investments.
According to the latest performance figures from MoneyMate, 12 unit trust sectors (out of 24) recorded a positive return for the quarter ended 30 June 2002. But the average return of the sector for domestic general equity funds, i.e. the laritest sector with the most investors, was only a meagre 1,0%. This, however, compares favourably with the return of -2,7% of the JSE/FTSE All Share Index. (In this article the returns for periods of more than one year are annualised and include initial costs. Returns for one year and less do not include initial costs.)
The performance of foreign general equity funds was a very disappointing -15,6%. In fact, none of the sectors for rand-denominated foreign, regional or worldwide unit trusts could achieve a positive return for the quarter.

Sector performance
The sector with the best performance for the quarter was domestic financial funds with a return of 9,7%. Financial portfolio managers proved their worth as far as stock selection capabilities are
concerned, with the average return of financial funds outperforming the JSE/FTSE Financials Index (+7,9%) by a comfortable margin. Financial funds were followed in the performance tables by domestic small company funds (+8,9%) and domestic bond funds (+8,4%).
The three top-performing funds for the quarter included three different sectors, with Sanlam Financial Fund the winner (+16,7%), followed by Investec Value Fund (+13,6%) and Fraters Earth Equity Fund (+13,3%). Investec Value and Fraters Earth Equity outperformed their comparative index, the JSE/FTSE All Share Index (-2,7%), handsomely.
The sectors with the worst performance for the quarter were world-wide technology funds
(-28,7%), foreign general equity funds (-15,6%) and regional general equity funds (-15,3%). The worst-performing fund was Old Mutual Global Technology Fund (-33,1%), followed by Sage Internet Fund (-31,5%) and ABSA I World-wide Technology Fund (-31,0%). It is interesting to note that Old Mutual Global Technology was the top-performing fund for the quarter ended 31 December 2001 with a return of 71,9%.

The return over six months were dominated by domestic old funds and domestic mining and resources. Standard Bank Gold Fund (+67,0%) was the top-performing fund over the six-month period, followed by Old Mutual Gold Fund (+64,9%) and Liberty Resources Fund (+30,9%).

Owing to the restructuring of the unit trust sectors by the Association of Unit Trusts, the two gold funds are no longer in a sector of their own, but have been incorporated with other smaller groupings into 'varied specialist funds'. Notwithstanding the good performance by gold funds, this mixed sector could only achieve the second-best performance for the six months (+8,2%), well behind the winning sector of domestic mining and resources funds (+20,2%). The mining and resources funds compare excellently with the JSE/FTSE Resources Index (+5,2%).

Similar to the performances over the first quarter of 2002, none of the sectors for rand-denominated foreign or world-wide unit trusts could achieve a positive return for the six months ended 30 June 2002. The sector with the worst performance was again world-wide technology funds (-37,9%), foreign general equity funds (-18,5%) and regional general equity funds (-16,0%).
The phenomenal returns on gold shares since the end of 2000 ensured that the two gold funds were the winning funds over the one-year period. The top-performing fund over the three-year period was Liberty Resources Fund, with the two gold funds taking second and third places. Sanlam Technology Fund and Sage Internet Fund, alternatively, were the bottom funds over both the one-year and three-year periods.

Cyclical markets
It is common knowledge (and is clearly indicated by the pattern of returns) that markets move in cycles and that the volatility in recent returns has increased substantially. Unit trust investors are currently faced with the important question of whether it is perhaps time to take some of the profits from funds and mining and resources funds and increase their exposure to financial and industrial funds.
The message to investors for the next six months of 2002 is very clear:
· there will always be some unit trusts with good performances and some with poor performances; but
·
the top performing fund of today may not necessarily be the top-performer of tomorrow, and the sector with the worst performance today may well be the top performer of tomorrow; thus
·
do not try to out-guess the market -maintain a well-diversified and well balanced portfolio of unit trusts that offers real value (underpriced sectors). This strategy will minimise your exposure to the poor performers (overpriced sectors) and reduce the volatility of your investment.

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