The Association for Savings and Investment South Africa (Asisa), the body representing the local life insurance and asset management industries, recently published a revised classification of collective investment schemes (CISs): the Asisa Fund Classification Standard, effective from October 1.
CISs are pooled investment funds that are marketed to retail investors, either directly through asset managers or indirectly via investment platforms, and to institutional investors, including retirement funds. They fall under the Collective Investment Schemes Control Act (Cisca), which provides for the protection of investors by separating the CIS management company from the fund manager (who selects the underlying investments) and the custodian of investors’ capital (a bank).
All unit trust funds are CISs, as are most exchange traded funds (ETFs). According to Asisa, there were 1 832 unit trusts and ETFs in South Africa as at December 31, 2023, collectively holding assets of R3.5 trillion.
Back in 2013 Asisa and its members undertook a major overhaul of the CIS classification system. Funds were classified first according to geography (the location of the underlying investments), second according to asset type, and third according to investment focus. This structure remains largely in place.
First tier: geography
The first tier of classification has three categories:
1. South African: the bulk of the portfolio (at least 55%, down from 75% in 2013) is invested in the local market.
2. Worldwide: the portfolio can invest in local and offshore markets without restrictions.
3. Global: the bulk of the portfolio (at least 80%) is invested in offshore markets.
A fourth category, Regional, which catered for funds investing in specific countries or offshore geographical regions, has fallen away, with these funds now incorporated into the Global category.
Second tier: asset type
There are four classes of assets in which funds can invest: listed shares (or equities), listed property, bonds and cash. The second tier of classification has the following categories:
1. Equity: at least 80% of the portfolio is invested in listed shares.
2. Multi Asset: the portfolio is diversified across different asset classes.
3. Interest Bearing: the portfolio invests exclusively in bonds, money-market instruments and other interest-earning securities.
4. Real Estate: investments are almost exclusively in listed property companies and real estate investment trusts.
Third tier: investment focus
Funds are further classified to cater for narrower asset-allocation criteria. Equity funds can be general funds or specialise in certain types of companies or market sectors. Multi-asset funds can be flexible (no restrictions on asset class allocations), have restrictions on allocations to equity (low, medium or high), or focus on income over capital appreciation. Interest Bearing funds are sub-categorised according to whether they hold longer- or shorter-term bonds, money-market instruments, or a mix of these. There are no third-tier categories, apart from General, for Real Estate funds.
What has changed and why?
The main changes have been the eradication of the first-tier Regional category, the introduction of South-Africa-only sub-categories under Equity and Multi Asset funds, the eradication of the Target Date sub-category under Multi Asset funds (these funds go into the Multi Asset Unclassified sub-category), and the introduction of a Variable Inflation Linked Bond sub-category under Interest Bearing funds.
The revision was prompted by, among other things, changes in legislation granting higher offshore allowances in retirement funds, says Sunette Mulder, senior policy adviser at Asisa. “In 2022 there was a change in offshore limits from 40% to 45%. As those offshore limits had been creeping up, we had asked at what point we would need to have South-Africa-only categories. The 2022 change to 45% was the tipping point, so the work started then. The amendments went through quite a few iterations, and the Standard that came into effect on October 1 was approved by the Asisa Investments Board Committee at the beginning of this year,” she says.
Mulder says it made sense to see if there was anything else that needed to be changed at the same time, thus the other changes. She says the classification system allows for new categories to be added where needed. Under Global Equity there is a category for funds primarily invested in Africa outside South Africa, which previously fell under Regional funds. Likewise, a category for funds investing mainly in, say, the US market could be introduced.
“If there is a need and there are five or more funds that fulfil the requirements for a new category, we will address it at that point,” she says.
Surprisingly, given the recent move in the investment industry towards investing offshore and taking advantage of the higher limits, there is a sizable number of Equity and Multi Asset funds that have zero offshore exposure. “We already have 60 funds approved in the SA Equity sub-category and eight funds in the Multi Asset SA High Equity sub-category,” Mulder says.
She says that if you compare long-term return profiles, there is still value in the South African market. “We also need to understand that investors’ liabilities are in South Africa. If they invest offshore, at some point that money is going to have to come back to cover the liabilities they have here, exposing them to exchange rate risk,” Mulder says.
• For details of the new categories, you can find the new Standard on the Asisa website, www.asisa.co.za.
* Hesse is the former editor of Personal Finance.
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