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New collective investment classification system

Published Jan 13, 2013


The Association for Savings & Investment SA (Asisa) has introduced a new classification structure for local collective investment schemes, which came into effect on January 1.

Asisa’s investment committee decided funds should be classified in terms of their investment universe: where they invest, what they invest in and their main investment focus.

At the first tier of the new system, you will find that all funds previously classified as domestic funds are now classified as South African funds. Where previously these funds had to have at least 75 percent of their assets invested in South Africa, they must now invest at least 70 percent in South African markets, and up to 25 percent in foreign markets and up to five percent in African markets.

Rand-denominated funds that invest in the financial markets of other countries have been reclassified as global funds to distinguish them from offshore funds that accept investments only in the currency of the country in which they are domiciled.

The worldwide category has been retained. Managers of worldwide funds have the discretion to invest 100 percent in foreign markets or 100 percent in South Africa, as they see fit.

A category for regional funds has been re-introduced. These funds are those that invest at least 80 percent of their assets in a specific geographic region, such as Asia, Europe, Africa excluding South Africa, or the United States.

After the first tier, which classifies funds according to where they invest, the second tier classifies funds according to the asset classes in which they invest: equity, real estate, interest bearing (previously fixed interest) or multi-asset class (previously asset allocation).

Equity funds are classified, at the third tier of the new system, as general, large cap, medium and small cap, resources, financial, industrial or unclassified. The unclassified funds were previously known as varied specialist funds.

The growth and value sub-categories have been removed from the classification system, because Asisa is of the view that funds should not be classified according to their investment style but rather according to their investment universe.

The funds that were previously classified in either of these sub-categories have all been reclassified as domestic equity general funds, as this sub-category reflects their investment universe, namely shares across the JSE.

Multi-asset class funds are classi-fied at the third tier as flexible, prudential low equity, prudential medium equity, prudential high equity or income.

Managers of funds in the multi-asset flexible sub-category will still be able to invest as much or as little in any of the various asset classes as they wish.

In the new multi-asset income sub-category, you will find funds that focus on producing an income. Funds are limited to investing a maximum of 10 percent in equities and 25 percent in listed property.

Most of the more than 70 funds in this new sub-category were previously classified as domestic fixed interest varied specialist funds, but a few funds, such as Coronation’s Optimum Income Fund and Investec’s Absolute Balanced Fund, were previously classified as domestic asset allocation targeted absolute and real return funds.

The sub-category for targeted absolute and real return funds is no longer part of the classification system. These funds have been reclassified into one of the five sub-categories in the multi-asset category, depending on their mandates.

Asisa is of the view that knowing a fund has a targeted return, such as inflation (the consumer price index) plus four percentage points, does not help you to know where the fund can invest, and these funds are better classified in a sub-category that defines their investment universe.

The sub-category for prudential variable equity funds has also been scrapped. Funds from this sub-category can now be found mostly in the prudential high equity sub-category, although some have moved into the prudential medium or low equity sub-categories.

Previously, the prudential fund sub-categories for low, medium and high equity exposure had both an upper and a lower limit on a fund’s exposure to equities. These categories now have only an upper limit and, as a result, there is no longer a need for the prudential variable equity sub-category, which catered for funds investing anything up to 75 percent in equities.

Funds in the low equity sub-category may invest up to 40 percent in equities, while medium equity funds may invest up to 60 percent. Previously, medium equity funds had to maintain an equity exposure of at least 40 percent.

Funds in the high equity sub-category will be able to invest up to 75 percent in equities. Previously they had to have a minimum exposure of 60 percent to equities.

Many, but not all, of the unit trust funds that retirement funds have to use are classified as domestic multi-asset prudential funds. Funds that retirement funds can use are classified according to their relevant sub-categories but must comply with regulation 28 of the Pension Funds Act, which sets limits on the allocation of assets.

The interest-bearing category has three sub-categories at the third tier: money market, short term and variable term.

The short term sub-category now houses funds that were previously classified as income funds and have a limit on their weighted average duration of two years (the average duration to maturity of the instruments in which a fund is invested).

Bond funds can now be found in the variable term sub-category and there is no restriction on the weighted average duration of the instruments in which they invest.

The fixed interest varied specialist sub-category has been scrapped, and many of these funds can now be found in the multi-asset income sub-category.

The real estate category continues to have only one sub-category for general funds. A significant change in this sub-category is that funds must hold at least 80 percent of their assets in listed property, up from 50 percent previously.

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