Question:
Is my money safe in Absa unit trusts at this moment?

Answer:
With all the talk of the global credit crisis, government rescue packages and banks shutting their doors it is not surprising that we as South Africans have started to question how safe we are from similar disasters. Of course, the recent media commentary on Absa and its Barclays relationship has caused an incredible amount of speculation.

Your particular concern is aimed at Absa unit trusts. Once you understand the structure and workings of a unit trust, it will be clear that the financial stability of a bank (or any other institution that is the management company of a unit trust) has no bearing on the safety of this investment. Nevertheless, it would be prudent to explore the status quo of banks and banking in South Africa.

Our banking system

The World Economic Forum recently released a report ranking various countries' banking systems. With the scoring between 1.0 (insolvent and possibly requiring a government rescue) and 7.0 (healthy, with sound balance sheets), South Africa was ranked in 15th place with a score of 6.5. This was one ahead of Switzerland and way ahead of the USA and UK, who took 40th and 44th place respectively.

So assuming that everything remains the same, the recent introduction of the National Credit Act should see our score rising even further in future. This has certainly shed a positive light on the soundness of our banking system.

Bank 'health'

It is important to also note that our banks are well capitalised. This is measured by a capital-adequacy ratio (the ratio of a bank’s capital to risk-weighted assets) and is set by the Reserve Bank at a minimum of 10 percent. This means that for every R1 deposit received, banks are able to lend R10. This is in stark contrast to the ratios of some US banks who could lend up to US$40 for every US$1 deposited.

The average capital-adequacy ratio for local banks as of June 2008 ranged between 11.7 percent and 13.8 percent with Absa at 12 percent.

Therefore, although there is a huge amount of uncertainty regarding the state of financial institutions globally, South African banks are in a far healthier state than many of their global counterparts and are therefore far less likely to fail.

Absa unit trusts

With that said, and in case there is still some uncertainty, allow me to put all fears to bed as we examine the structure of a unit trust and how one will not lose any money if in a 'Absa unit trust' because of it’s uncertainty with Barclays.

Unit trusts are governed under the Collective Investment Schemes Act (CISCA) and are regulated by the Financial Services Board (FSB). In order to have a fund registered with the FSB there are a number of due diligence, compliance and reporting the trustee or custodian will need to abide by, least of which is to recognise the basic structure of a Unit Trust.

The fundamental premise behind a Unit Trust is simple: a group of investors pool their money to get a spread of shares and stocks that are professionally managed according to a specific mandate. Participation (and beneficial ownership) in this trust is determined by the number of units you (as an investor) hold in the trust — hence the name 'Unit Trust'. Each investor therefore participates in the gains and losses in direct proportion to their ownership.

There are essentially three elements to a Unit Trust namely: a Trust Deed, the trustee or custodian and the Management Company (in this case it’s Absa).

The trustee’s role is to ensure the management company operates in accordance with the trust deed and also acts as the custodian of all cash and securities in the portfolio.

The management company (which is also often the fund manager) undertakes to manage and invest the funds in accordance with the trust deed. This usually gives rise to what is known as a mandate, which ultimately dictates the type of assets and securities you will be invested in. A fund fact sheet is usually a good indicator of the specific mandate of a fund.

What this then shows us is that the underlying assets in the fund do not belong to the fund manager or the management company, but rather are held on behalf of an investor by the trustee. This essentially provides very important protection for investors.

So what does this all mean?

Even if Absa fell off the face of the earth, the trustee would have the power and obligation to appoint a new fund manager to manage your Unit Trust.

So, as the Barclays/Absa 'saga' continues to play out on most media platforms you can rest assured that your Unit Trust investment is safe from any commercial uncertainty of the bank as well as any speculative talk on a British Government take-over!

As mentioned before, this explanation does not cover any losses that may result from market movements or security selection that is held within the portfolio. It would be a good idea to engage with a Certified Financial Planner to ensure that this investment strategy is in accordance with your holistic financial plan.

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