02 Jul 9 questions we often get asked about our tax managed funds
Due to the unique nature of the underlying assets of the Sanlam Alternative Income Fund (SAIF) and the Sanlam Diversified Income Fund of Funds (SDIFoF), we often receive questions. Over the years a few, more frequently asked questions, have stood out. We answer some of these questions below.
What is the difference between SAIF and SDIFoF?
There are several differences between the funds. The main differences are:
- SAIF invests mainly in unlisted redeemable preference shares (prefs) and in liquid instruments. SDIFoF invests approximately 75% in SAIF and the remainder in income funds and money market funds.
- The unit price of SAIF is targeted at a constant value of R1 while SDIFoF uses NAV pricing.
- SAIF has a short-term investment horizon while the suggested investment horizon for SDIFoF is three months or longer.
Shouldn’t I just invest directly in unlisted redeemable prefs?
Unlisted redeemable preference shares (prefs) are not normally readily available, and are issued in large tranches of around R100 million to R300 million each with issuers preferring institutional investors to retail investors. Furthermore, redeemable prefs have a minimum term to redemption of three years. A shorter term would result in the dividend being taxed at full income tax rates, effectively locking the investor in.
SAIF and SDIFoF provide the following benefits over direct investment in unlisted redeemable prefs:
- Issuer diversification
- Lower minimum investment amounts
- Access to the asset class
Why do all the unlisted prefs have a minimum term to redemption of three years?
Legislation determines that if the holder of a redeemable preference share has the right to redemption within three years from the date of issue, the dividend from that pref will be taxed at full Income Tax rates instead of at the lower Dividends Tax rate.
Therefore, a minimum three year term to redemption ensures the dividend income can be earned at tax efficient rates.
If redeemable prefs typically have a minimum three year term to redemption, how do you manage liquidity in SAIF?
Since the launch of SAIF in 2007, the fund has experienced steady growth with new pref issuance taken up evenly throughout the period. As a result, a large portion of the prefs in the fund has been in issue for longer than three years and can be redeemed within notice periods ranging between seven days and 90 days.
The fund has assets under management of over R7 billion with a diverse investor base. The fund also has various liquidity arrangements in place to manage liquidity effectively.
What stops me from setting up my own “SAIF”?
There are various limitations that could make the launch of a new fund, investing directly in unlisted redeemable prefs, very difficult.
- Liquidity: When setting up a fund like SAIF, all redeemable prefs in the fund will initially have a minimum three year term. This term places huge liquidity constraints on any redemption and effectively prevents the manager from providing 24 hour liquidity to investors.
- Diversification and compliance: Board Notice 90 of the Collective Investment Schemes Control Act of 2002 restricts counterparty exposure to 30% per single counterparty. For a new fund, this means that multiple issuers would have to come to the market simultaneously and the chances of that happening are highly unlikely.
- After-tax return: Pref shares are normally issued in tranches of R100 to R300 million. A new fund would need to build up large cash reserves in order to take up issuance, which in turn would dilute the fund’s after-tax returns as the interest portion included in the total return will rise.
However, it is possible to set up a fund of funds using SAIF as a building block.
How quickly do redeemable prefs, and therefore these funds themselves, react to interest rate hikes?
The standard redeemable pref has a variable return, linked to either Prime or JIBAR. None of our prefs have fixed rates.
Up to 90% of SAIF’s portfolio is invested in redeemable prefs, with the remainder allocated to money market funds and cash. Therefore, interest rate hikes will reflect in the funds’ return immediately for Prime linked assets, which make up the majority of the fund.
The duration of the fund is dependent on the duration of its underlying funds.
What is the difference between listed and unlisted prefs?
The real question is whether the pref is redeemable or perpetual.
Unlisted prefs are normally redeemable. Redeemable prefs have a finite lifetime (e.g. three years), after which the shares will redeem at par value. These shares are normally not traded during their lifetime and therefore have no capital/price volatility.
Listed shares are normally perpetual. Issuers of perpetual prefs are not obligated to redeem the prefs. These shares have no fixed redemption date and trade in the open market, resulting in price volatility.
What fees do the funds charge and are these fees paid from investors’ capital?
SAIF and SDIFoF have no initial or performance fees, only annual management fees. The returns that we circulate are net of annual management fees and are deducted from investors’ monthly income distributions, not from capital.
How do you calculate the after-tax returns for these funds?
The total returns of the funds are broken down into the different components (before tax is taken into account). These components are dividends, interest and capital growth.
The after-tax returns are calculated for both individuals and companies by deducting the following tax rates from the total returns:
|EFFECTIVE TAX RATES FOR|
|Capital growth||No capital gains tax is taken into account on the growth portion as capital growth for each investor will differ depending on the investment period. This component only applies to SDIFoF as SAIF has a constant unit price.|
The pre-tax equivalent that accompanies an after-tax return is the amount of interest an investor would have to earn to achieve the equivalent after-tax return.
Contact us if there are other questions you’d like answered.
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The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium- to long-term investments. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available from the Manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved Manager in Collective Investment Schemes in Securities. Additional information of the proposed investment, including brochures, application forms and annual or quarterly reports, can be obtained from the Manager, free of charge. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in the portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of the portfolio and the investor will differ depending on the initial fees applicable, the actual investment date, and the date of reinvestment of income as well as dividend withholding tax. Forward pricing is used. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The performance of the portfolio depends on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-div date. Lump sum investment performances are quoted. The portfolio may invest in other unit trust portfolios which levy their own fees, and may result is a higher fee structure for our portfolio. All the portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No 45 of 2002 (“CISCA”). The fund may from time to time invest in foreign instruments which could be accompanied by additional risks as well as potential limitations on the availability of market information. The Manager has the right to close any portfolios to new investors to manage them more efficiently in accordance with their mandates. The portfolio management of all the portfolios is outsourced to financial services providers authorized in terms of the Financial Advisory and Intermediary Services Act, 2002. Standard Bank of South Africa Ltd is the appointed trustee of the Sanlam Collective Investments Scheme
Fund Manager: Sanlam Collective Investments (RF) (Pty) Ltd. Co-investment managers: Sanlam Structured Solutions, a division of Sanlam Investment Management (Pty) Ltd, and Ora Fund Managers (Pty) Ltd.