Page 141 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Classification of CISs

Capped Fund
A capped fund is a fund which is closed to new investment. Both SA domiciled and
offshore funds may be capped when they get too big (mainly because a large fund can
be difficult to manage). This usually does not affect existing debit order clients.
South African domiciled funds in the Global category depend on the asset swap capacity of the
management company. When this limit is reached, the fund is forced to turn away new investment.

The test is what assets are held, not how they are held. Similarly, index funds – although they
have distinct features which distinguish them from other funds – are heterogeneous when it comes
to underlying assets. Some index funds track domestic equity indices, others track bond indices,
and still others track global indices.
To assist investors to identify types of funds that span a variety of categories, the ASISA
classification standard requires that fund names incorporate distinguishing words and phrases:
A fund of funds must have “fund of funds” in its name
Index funds must contain the word “index” or “tracker”
Money market fund names must contain “money market”
Feeder portfolios must contain the phrase “feeder fund”
Funds may only use the term “institutional” if they are exclusively available to retirement
funds, long-term insurers, investment managers and collective investment schemes. If a fund has a
retail class it cannot be called institutional.
Rankings and Comparisons
An important objective of any classification standard is to facilitate comparison of like with
like. Unit trusts in a sector such as Equity General, for example, can be ranked to show the best
and worst performing funds over a range of periods. Given that all the funds in the sector must
choose from the same investment universe and must comply with the same asset allocation
rules, such a comparison reveals which manager hasdonethe best job. Thesameisnot true,
however, if comparisons are made across sectors. Ranking the performance of, say, an equity
fund and an interest bearing fund might provide insight into the comparative performance of the
stockmarketand themoney market butitsaysnothing about the performance of the respective
managers – the state of their mandated investment universes will have a far greater impact on
fund performance than any investment decisions they make.
In line with the principle of comparability, certain sectors should not, according to the ASISA
standard, be ranked. These include the “Unclassified” categories, which typically contain a mix of
heterogeneous funds that cannot be accommodated elsewhere in the sector structure – typically
because there are not enough funds of that type to justify a separate category.
Overview
The classification system consists of a three-tier structure, which is illustrated on the following
page. The first-tier groups funds according to the geographic focus of the underlying assets; the
second-tier is concerned with the broad asset allocation of the fund; and the third-tier allows a
more discreet definition of asset allocation. It is important to understand that the four first-tier
categories (the four geographic divisions) can be combined with any of the four second-tier
divisions. The third-tier classifications, however, are specific to their second-tier “parent”
categories.
First Tier
At the first level, funds are classified according to the geographic focus of their underlying
investments – whether they are invested in South Africa, offshore, or in a combination of local and
offshore assets.

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Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts