YOU’RE spoilt for choice when it comes to selecting a collective investment scheme, such as a unit trust fund or an exchange traded fund, in which to put your money. In fact, the choice is now so broad that it’s a minefield for anyone without some basic knowledge of investments and asset classes.
It’s no easy task to home in on funds that are specifically suited to your investment criteria. The first step in narrowing down your choice is through the classification system that applies to funds offered by South African providers, as determined by the Association for Savings & Investment SA (Asisa).
Formally known as the “Asisa standard for fund classification for South African-regulated collective investment portfolios”, the system “provides a framework within which portfolios with comparable investment objectives and investment universes are grouped together … and is a key tool for investors and their advisers in … the consideration of investment choices”.
Funds are classified in two broad tiers, the first geographical, the second the type of investment based on asset class. A third tier provides narrower sub-categories (see diagram below).
Tier 1: Geographical
Funds are classified according to the regions in which the underlying investments are made.
The categories, according to the Asisa standard, are:
• South African portfolios, which invest at least 70% of their assets in South African markets, such as the JSE. They may invest up to 25% of their assets outside South Africa and an additional 5% in Africa excluding South Africa.
• Worldwide portfolios, which invest in both South African markets and foreign markets. There are no limits for either domestic or foreign assets.
• Global portfolios, which invest at least 80% of their assets outside South Africa. There is no restriction on the assets invested in a specific country (for example, the United States) or geographical region (for example, Africa).
• Regional portfolios, which provide investors with at least 80% exposure to assets in a specific country or geographical region outside South Africa.
Tier 2: Asset mix
Funds are classified according to the asset classes, or the mix of classes, in which a fund invests.
The four basic asset classes are listed shares (also known as equities), bonds (interest-bearing loans issued by governments and corporations), cash (interest-bearing bank instruments) and property (listed property companies and property investment instruments).
The categories, according to the Asisa standard, are:
• Equity portfolios, which invest a minimum of 80% of their portfolios in equities and “generally seek maximum capital appreciation as their primary goal”. Sub-categories for South African equity funds narrow the investment universe down to specific market sectors, such as financial shares, industrial shares or resources shares. There are also sub-categories for large-cap shares (large companies with high market values, also known as blue-chip shares) and small-to-medium-cap shares (smaller and emerging companies). Investment risk: medium to high.
• Real estate portfolios, which invest at least 80% of their assets in listed property shares, other collective investment schemes investing in property and real estate investment trusts. The objective is to provide high levels of income and long-term capital appreciation, according to the Asisa standard. Up to 10% of the portfolio may be invested in shares outside the defined sectors in companies that conduct similar business activities. Investment risk: medium to high.
• Interest-bearing portfolios, which invest exclusively in bonds, money market investments and other interest-earning securities. They may not invest in equities or listed property. Sub-categories are variable-term instruments, short-term instruments and money-market instruments. Investment risk: low to medium.
• Multi-asset portfolios, which invest in a spread of investments in the equity, bond, money and property markets to maximise total returns (comprising capital and income growth) over the long term, according the Asisa standard.
The main sub-categories are:
– Flexible: no restrictions on investments across asset classes. Investment risk: variable, but can be high.
– High equity: equity exposure (including international equity) of up to 75% and property exposure (including international property) of up to 25% of the value of the portfolio. Investment risk: medium to high.
– Medium equity: equity exposure (including international equity) of up to 60% and property exposure (including international property) of up to 25%. Investment risk: medium.
– Low equity: equity exposure (including international equity) of up to 40% and a property exposure (including international property) of up to 25%. Investment risk: medium.
– Income: equity exposure (including international equity) of up to 10% and a maximum effective property exposure (including international property) of up to 25%. Investment risk: low to medium.
Funds’ own criteria
Funds that fall in a certain subcategory must stick to the criteria required for that category, but may also impose their own investment mandates, which may further narrow the universe of assets they invest in. Two examples:
• Coronation Top 20 Fund: This is a South African general equity fund, and as such may invest 25% of its assets offshore and a further 5% in Africa. However, the fund’s mandate restricts the portfolio to holding 20 shares on the JSE (about 95% of the portfolio, with the rest in cash).
• Marriott Core Income Fund: This is a South African multi-asset flexible fund. Unlike most funds in this sub-category, which are generally high in equities, it is mainly invested in low-risk, interest-bearing instruments, although it will venture into listed property when conditions are favourable.
Broader restrictions on funds
In terms of the Collective Investment Schemes Control Act:
• Unit trust funds are not allowed to invest more than 10% in the shares of unlisted companies.
• Unit trusts are not permitted to have a weighting of more than 5% in any one listed share, unless:
– The market capitalisation of the company exceeds R2 billion; or
– The company concerned has a weighting of more than 5% in the index against which that the unit trust is benchmarked.
• Unit trust fund managers may not borrow money to invest; neither may they short the market (sell shares they do not own). However, managers are permitted to use derivatives to hedge up to 20% of their portfolios against a stock market decline.