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  Nice explanation which I forwarded to a relative who is getting the runaround and confused by all the chatter from "financial advisors" .......  

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Unit trust categories: What do they mean?

And how do they help investors?

CAPE TOWN – When any new unit trust is launched in South Africa, it has to apply to the Association of Savings and Investment South Africa (ASISA) for a classification. This is the category that it must state on its minimum disclosure document (MDD).

The primary reason for this is to assist investors with fund selection. This is achieved in two ways.

Firstly, every category has set parameters. For example, all funds in any equity category have to have at least 80% of their assets invested in listed stocks at all times. 

This helps investors to identify the kind of fund they are looking for. There are currently more than 1 400 collective investment schemes registered in South Africa and if there were no way of telling them apart it would be extremely difficult for anyone to identify which funds are suitable for their purposes.

At the same time, fund categories give investors a clear idea of what they should expect. If you invest in a South Africa equity fund, for example, you can be sure that the fund will have to remain predominantly invested on the JSE. The managers can’t suddenly change their minds and take all the money offshore or put it in the money market.

Secondly, the categorisation allows investors to compare individual funds more easily. Generally speaking, all the funds in the same category can invest in the same pool of assets and therefore their risk and return metrics are directly comparable to each other.

If you looked at the ten-year returns on all South Africa equity general funds, for instance, you could legitimately rank them against each other. However, you couldn’t compare a South African equity general fund with a global equity general fund, because their investment universes are different.

The categories

 In order for investors to make informed decisions, however, they still need to understand what the different fund categories mean. It is therefore worthwhile to break down the various classifications.

 At the highest level, funds are separated into four categories which denote their geographical focus – South Africa, global, worldwide, or regional. South African funds must invest at least 70% of their assets within South Africa. They may invest up to 5% in the rest of Africa, and a further 25% anywhere else in the world.

Global funds, are roughly the opposite. They must invest at least 80% outside of South Africa.

Worldwide funds have no limits on where they can invest. In other words, they could be invested 100% in South Africa or 100% offshore, and this could vary depending on the view of the manager.

Those in the regional categories must invest at least 80% of their assets in a specific country, such as China, or a particular region, such as Africa outside of South Africa. These are therefore specialist funds.

Tier 1: Geographical classifications

South Africa

Global

Worldwide

Regional

Minimum 70% local

Minimum 80% offshore

No restrictions

Minimum 80% in a specific region

 The second level of classification specifies the main asset allocation. Here, again, there are four categories – equity, real estate, interest bearing and multi-asset.

Equity funds must have at least 80% of their money in the stock market at all times, while real estate funds have to keep 80% or more of their assets in listed property counters. Interest bearing portfolios invest exclusively in interest bearing assets, such as bonds and money market instruments, and may not invest in at all in equity, listed property or preference shares. Funds in the multi-asset categories combine all of these different asset classes together.

 

Tier 2: Asset class classifications

Equity

Real estate

Interest bearing

Multi asset

Minimum 80% in listed equity

Minimum 80% in listed property

Only bonds and cash

Across asset classes

 

There is also a third tier of classification, which further defines what, and how much of it, these different funds can hold. For instance, among equity funds there are sector-specific portfolios such as industrial funds, or mid- and small-cap funds that must invest in these particular areas of the market. Interest bearing portfolios are also segregated into those that invest only in the money market, and those that invest in bonds of different duration.

Among multi-asset funds this third level of distinction sets out the range of asset allocations that these funds are allowed. This effectively also defines their broad risk profiles.

The only asset classes on which limits are set are equity and property. These are considered the most risky asset classes, and therefore those allowed higher allocations are considered higher risk, but also likely to give higher long-term returns.

The table below sets out the maximum allowances for the different categories:

Multi asset fund classifications

 

Flexible

High equity

Medium equity

Low equity

Income

Equity

No limit

75%

60%

40%

10%

Real estate

No limit

25%

25%

25%

25%

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Johan Burger

Johan Burger

Brenthurst Wealth
Moneyweb Click an Advisor
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Nice explanation which I forwarded to a relative who is getting the runaround and confused by all the chatter from “financial advisors” ….

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