Investment in foreign unit trusts

Namfisa if of the opinion that a Namibian fund is free to invest in a unit trust scheme anywhere in the world and that its only concern is that the underlying assets comply with the requirements of regulation 28.

Regulation 28 restricts investments in banks and in building societies to institutions registered in terms of the relevant law in Namibia. Investments in bills, bonds and securities issued by foreign governments or other institutions, requires approval of the country and the institution by the Registrar. Regulation 28 also recognises only stock exchanges registered in Namibia or within the common monetary area for the purpose of determining market value for a quoted asset.

However, Regulation does not apply equally strict controls on unit trust schemes despite the fact that an additional risk layer is introduced in the form of the unit trust scheme, that owns the underlying investments. In latter case the requirement for a unit trust scheme is only that it meets the definition of unit trust scheme in the Unit Trust Control Act. The Unit Trust Control Act 54 of 1981 defines a unit trust scheme as “…any scheme or arrangement in the nature of a trust in pursuance of which members of the public are invited or permitted, as beneficiaries under the trust, to acquire an interest or undivided share (whether called a unit or by any other name) in one or more unit portfolios and to participate proportionately in the income or profits derived therefrom”.

Regulation 28 requires an exposition of a Namibian pension fund’s investments as set out in Annexure 1 to the regulation, based on the market value of the fund’s investments. Market value is to be determined in one of two possible manners:

1. Firstly value is to be determined by reference to its value quoted by a stock exchange licensed under the Namibian Stock Exchanges Control Act or any other stock exchange within the common monetary area.
2. Assets to which the first method does not apply, have to be valued in accordance with section 19(5A) of the Pension Funds Act. In short section 19(5A) stipulates that market value is:
   • the price which would be obtained on sale in the Republic,
   • between a willing seller and a willing buyer,
   • as estimated by a person appointed by the Namibian pension fund concerned for that purpose.

The implication of the afore going is that a Namibian pension fund cannot invest in any asset that is not listed on a Namibian licensed stock exchange or a stock exchange within the common monetary area, unless market value can be determined in accordance with section 19(5A) of the Pension Funds Act.
An investment in a foreign unit trust raises a few grave concerns:

1. First and foremost, the onus rests on the trustees to execute due diligence procedures with regard to the unit trust scheme in which the fund invests.
2. Assets quoted on any stock exchange within the common monetary area (typically SA unit trust schemes) can be valued based on the quoted price, while the valuation of all other assets will have to comply with the requirements of Section 19(5A) of the Pension Funds Act.
3. For foreign assets not quoted on a ‘recognised’ stock exchange (typically offshore unit trust schemes) all 3 above requirements pose difficulties:qqq
   • A Namibian registered institution or citizen cannot freely sell or buy foreign assets without Bank of Namibia approval. This casts serious doubts on the principle of a sale ‘in the Republic’. In fact this requirement could be interpreted as requiring the asset to be physically located within Namibia.
   • Once a sale in the Republic is subject to regulatory approval, the principle of willing seller and willing buyer becomes questionable.
   • A Namibian fund would be required to appoint a person specifically for the purpose of determining the value. At best this means that the agreement with the unit trust scheme manager needs to incorporate this requirement as a specific obligation, with reference to the requirements of Section 19(5A) of the Namibian Pension Funds Act.
   • An investment listed on a stock exchange outside Namibia and the common monetary area cannot be valued based on its listed price but will have to be valued in accordance with Section 19(5A) of the Pension Funds Act.
   • A valuation of an asset listed on a stock exchange other than based on its listed price, however, would contravene international accounting conventions. This could result in a qualified audit opinion and it will be very difficult to obtain any other valuation.

In conclusion, an investment in a foreign unit trust scheme is unlikely to comply with the above. Where trustees retain the investment discretion, they should give serious consideration to the above legal requirements before investing in a foreign unit trust scheme. Where trustees grant the investment manager full investment discretion , they should establish from the manager how he envisages complying with these requirements.

Coincidentally we came across an article that examines the trustees due diligence obligation when placing moneys in investments. Read it here...

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.