The Association for Savings and Investment South Africa’s revised Classification Standard for unit trust funds came into effect on 1 October.
ASISA – which represents the savings, investment, and insurance industry – said the revisions will make it easier for investors to compare the performances and risk profiles of South African collective investment schemes (CIS) that invest in securities (shares, bonds, listed property, and other listed and unlisted investments).
Collective investment schemes that invest in securities are commonly known as unit trust funds and are the most popular pooled retail investments in South Africa. Many exchange-traded funds are also unit trust funds.
There were 1 852 local unit trusts collectively holding assets of R3.64 trillion at the end of June.
Sunette Mulder, senior policy adviser at ASISA, said the review of the Fund Classification Standard was necessitated by the increase, in 2022, in the offshore investment limit for retirement funds from 30% to 45%.
At the time, the Standard limited offshore exposure for South African CIS portfolios to 40% (30% outside of South Africa and an additional 10% of assets in Africa, excluding South Africa).
Mulder said the previous version of the Standard had been in force since January 2013.
“Since the Standard had to be amended, we used the opportunity to do a full review of the Standard to ensure that it continues to meet its key objective, which is to provide investors with a classification system that enables meaningful comparison of performance and potential risks when investing in a particular type of CIS portfolio.”
Three tiers of the Standard
The Standard provides for a three-tier classification of CIS portfolios based on the investable universe.
The first tier classifies portfolios based on their top-level geographical exposure: South African, worldwide, and global.
Worldwide portfolios invest in both South African markets and foreign markets. There are no limits on their domestic or foreign assets. Global portfolios invest at least 80% of their assets outside South Africa.
The second tier classifies funds according to their underlying asset classes: equities, multi-asset, interest-bearing, and real estate.
The third tier classifies funds in line with their primary focus within the investment universe – for example, equity general, multi-asset high equity, interest-bearing variable term, and real estate general.
Changes to the first tier
Mulder said the main change under the first-tier geographic classification redefines South African portfolios as those that invest at least 55% of their assets (down from 60% in 2021) in South African investment markets, in line with the new offshore limit.
In addition, the split between offshore and rest-of-Africa exposure has been removed, which means the remaining 45% can be invested anywhere outside South Africa.
ASISA also removed the “regional” category because few portfolios used this classification. These funds have moved into the “global” category.
Second tier unchanged
No changes were made to the second-tier category, and the four asset classes remain as:
Equity portfolios invest a minimum of 80% of their market value in equities and generally seek maximum capital appreciation as their primary goal.
Multi-asset portfolios invest in a wide spread of investments in the equity, bond, money, and property markets to maximise total returns (comprising capital and income growth) over the long term.
Interest-bearing portfolios invest exclusively in bonds, money market investments, and other interest-earning securities. These portfolios may not include equity securities, real estate securities or cumulative preference shares.
Real estate portfolios invest in listed property shares, collective investment schemes in property and property loan stock, and real estate investment trusts. The objective of these portfolios is to provide high levels of income and long-term capital appreciation. These portfolios invest at least 80% of their market value in shares listed in the FTSE/JSE Real Estate industry group or similar sector of an international stock exchange and may include other high-yielding securities from time to time. Up to 10% of a portfolio may be invested in shares outside the defined sectors in companies that conduct similar business activities as those in the defined sectors.
Changes to the third tier
The following changes have been made to the third-tier category, which reflects the investment focus of portfolios.
Equity portfolios
A new category, “SA equity SA general”, has been introduced for portfolios that invest exclusively in local shares.
Mulder said the difference in the return profile of portfolios invested in local and foreign markets, often amplified by currency fluctuations, created an environment where funds grouped together in the “SA equity general” category often no longer had a comparable investment universe. This resulted in a categorisation that did not allow for meaningful comparison.
About 60 of the 243 funds in the “SA equity general” category applied to move to the “SA equity SA general” category when the revised Standard came into effect on 1 October.
Furthermore, a new “equity Africa” category was created under the first-tier “global” category. These portfolios invest at least 80% in selected shares from equity markets in Africa excluding South Africa. They do not subscribe to a particular theme or investment style and invest across all market sectors and market capitalisations.
Multi-asset portfolios
Mulder said that in line with the changes made to the “SA equity general” category, a new category, “multi-asset SA high equity”, was added to the multi-asset portfolios. Portfolios in this category invest in South African equity, bond, money, or property markets and hold 100% of their market value in South Africa.
Of the 263 funds in the multi-asset high-equity category in June, eight funds have so far applied to move to the multi-asset SA high equity category.
Interest-bearing portfolios
In the “South African interest-bearing” category, the name of the “money market” category has been changed to “SA money market”.
A new category has been introduced at this level of classification: “variable-term inflation-linked bonds” (ILBs), which is for portfolios that invest at least 80% of their market value in ILBs.
A new category, “unclassified”, has been introduced at the third level of classification for global portfolios. Unclassified global interest-bearing portfolios invest in a spectrum of bonds, fixed deposits, and other interest-bearing securities. The category is for portfolios that cannot be compared because of their unique investment objectives.
Further information
Click here to download the revised Fund Classification Standard.
The ASISA Fund Classification Tool on SmartAboutMoney, a consumer education initiative supported by ASISA, enables investors to match their portfolios to the relevant categories. The tool also provides a detailed overview of each category.
