Unit trust investors may find their funds listed in new sub-categories next year after the Association for Savings & Investment SA (Asisa) this week announced a new classification structure for local collective investment schemes.
Most of the funds that will be reclassified are in the domestic equity growth, domestic equity value, domestic asset allocation targeted absolute and real return, and domestic fixed-interest varied specialist sub-categories.
Asisa’s investment committee has decided that funds should be classified in terms of their investment universe: where they invest, what they invest in and their main investment focus.
The investment style of a fund – for example, whether it follows a growth or value style, or, in the case of a targeted absolute and real return fund, whether it targets a return – will no longer be taken into account when a fund is classified.
Leon Campher, chief executive officer of Asisa, says whereas the current fund classification structure serves mainly as a marketing tool for management companies, Asisa believes the new structure will make it easier for investors to understand exactly the nature of the funds in which they invest.
The unit trust funds that retirement funds have to use, many of which are classified in the domestic asset allocation prudential sub-categories, will, from January 1 next year, be labelled as complying with regulation 28 of the Pension Funds Act and classified in their relevant sub-categories.
Campher says although an income fund may be compliant with regulation 28, investors who are selecting an under-lying investment for a retirement fund may currently be overlooking it, because the fund is not in one of the asset allocation prudential sub-categories.
From January 1 next year, you will be able to identify clearly which funds comply with regulation 28.
Domestic funds will be renamed South African funds. These funds will have to invest at least 70 percent of their assets in South Africa (down from the current 75 percent), a maximum of 25 percent in foreign markets and a maximum of five percent in African markets.
Rand-denominated foreign funds will be renamed global funds to help investors distinguish these funds, which invest in foreign markets and accept your investment in rands and pay you out in rands when you disinvest, from funds that accept investments only in the currency of the funds and are domiciled in a country other than South Africa.
The worldwide category will be retained, and funds in this category will continue to have no restrictions on how they invest their assets.
From January 1, the managers of worldwide funds will 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 will be re-introduced. These funds will have to invest at least 80 percent of their assets in a specific geographical region, such as Asia, Africa excluding South Africa, or the United States.
Once funds have been classified according to where they invest, the second tier of the new structure will classify funds according to the main assets in which they invest. This tier will remain largely unchanged: funds will be classified as equity, multi asset (currently asset allocation), interest bearing (fixed interest) and real estate.
Equity funds will be classified, at the third tier of the new structure, as general, large cap, medium and small cap, resources, financial, industrial and unclassified.
The equity growth and the equity value sub-categories will be merged with the general sub-category, because funds in these sub-categories have the same investment universe. There are currently seven growth funds and 18 value funds.
The varied specialist sub-category will become the unclassified sub-category, which will be for funds that cannot be classified in any of the other sub-categories.
The interest bearing category will consist of three sub-categories at the third tier: money market, short term and variable term.
The short term sub-category will be for funds that are currently 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).
The variable term sub-category will be for funds that currently fall into the bond sub-category and have no restriction on the weighted average duration of the instruments in which they invest.
The fixed interest varied specialist sub-category will close. Funds in this sub-category typically invest across fixed-interest instruments, favouring longer-term bonds when they look attractive and shorter-term money market instruments when they offer better returns.
Some of the varied specialist funds invest in listed property and some invest in equities, often shares that are suitable for investors who need an income and that produce good dividends.
The 88 funds in the varied specialist sub-category are expected to move, in the main, to the new multi asset income sub-category.
The real estate category will, as is the case now, consist of only one sub-category: general funds. The significant change in this sub-category is that funds will have to hold at least 80 percent of their assets in listed property, up from the current 50 percent.
Peter Blohm, senior policy adviser at Asisa, says there has been a huge increase in the number of listed property shares, and the managers of the 25 real estate funds have agreed to abide by the higher limit in order to stay in the sub-category.
CHANGES TO EQUITY EXPOSURE LIMITS FOR MULTI ASSET FUNDS
The asset allocation category will be renamed the multi asset category from January 1. Funds in this category may invest across the equity, property and fixed-interest asset classes.
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.
A new sub-category, multi asset income, will be introduced for funds that focus on producing an income. Funds in this sub-category will be limited to investing a maximum of 10 percent in equities and 25 percent in listed property.
Of the four prudential sub-categories, the three that are for funds with a low, medium or high exposure to equities will remain. Whereas these sub-categories have both an upper and a lower limit on a fund’s exposure to equities, from January 1 next year there will be an upper limit only.
Funds in the low equity sub-category will be able to invest up to 40 percent in equities, while medium equity funds will be able to invest up to 60 percent. Currently, medium equity funds have 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.
The fourth prudential sub-category, variable equity, where funds may invest between nothing and 75 percent in equities, will close, and these funds will be housed in the high equity sub-category.
The domestic asset allocation targeted absolute and real return sub-category will close, and its 72 funds will be housed in other multi asset sub-categories.
The sub-category was set up for funds that explicitly target a return – for example, inflation as represented by the consumer price index plus four percentage points. These funds may also aim to avoid negative returns over a rolling three-year period.
But a target does not tell you the assets in which a fund invests, and the returns of these funds have varied widely despite sharing a sub-category, Leon Campher, chief executive officer of the Association for Savings & Investment SA, says.
MOST FUNDS WON’T HAVE TO ADJUST THEIR INVESTMENT MANDATES
Most unit trust funds will be reclassified without having to change their investment mandates, Peter Blohm, senior policy adviser at the Association for Savings & Investment SA (Asisa), says.
If a fund wants to change its mandate in order to be classified in a particular sub-category, its investors will have to vote on the proposed changes, he says.
Funds that move to new sub-categories will keep their performance history unless they change their investment mandates, Blohm says.
In terms of the new classification system, the name of fund must be a true reflection of its nature. In addition, the following naming conventions will apply:
* Funds of funds will have to include the words “fund of funds” in their names;
* Index portfolios will have to include the word “index” or “tracker” in their names;
* Feeder portfolios will have to include the words “feeder fund” in their names;
* Money market portfolios will have to include “money market” in their names; and
* Portfolios will be allowed to include the word “institutional” in their names only if they are available exclusively to retirement funds, long-term insurers, investment managers or collective investment schemes.