Page 143 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Classification of CISs

The large variety of CISs available means that investors and financial advisors must be
well-informed in order to choose appropriate investments. Investors and FAs must be aware
of the mandates, investment risks and tax implications associated with each category. The full
classification standard is available on the ASISA website. It is a comprehensive 28-page
document. Although aimed principally at fund managers it is a useful reference for FSPs. It is important
that investors buy collective investments that are compatible with their risk profiles.

This mechanism was replaced in the 2001 budget with a system that allowed management
companies to invest offshore up to 10% of the previous year’s inflows. The system was changed
again, however, from 31 July 2003, when new reporting regulations were introduced via circulars
D403 and D427. The requirements were changed in an effort to prevent double counting of assets
in the industry.
In terms of the reporting requirements, an institution may hold a percentage of assets offshore
subject to certain rules:
Up to 25% of retail assets in the case of retirement funds and the underwritten policy
business of long-term insurers
Up to 35% of total retail assets in the case of collective investment schemes and the
investment-linked business of long-term insurers
Institutional investors are allowed to invest an additional 5% of their total retail assets by
acquiring forex-denominated portfolio assets in Africa through foreign currency transfers from SA
or by acquiring approved inward listed instruments on the JSE.
In the case of CISs, the figure relates to total assets under management by the management
company, not a particular fund.
As mentioned, the allowance is calculated for a CIS manager, not a fund. The allowance can be
used to create a single “offshore” fund in the CIS manager’s suite of funds, or the CIS manager can
choose to allocate bits of the offshore allowance to different funds. The CIS manager is obliged to
close the fund to new investments if the maximum offshore “allowance” has been reached.
However, as the assets under management grow, it can “uncap” its foreign funds and open them to
new investment – until the limit is reached again.
Regional Funds are funds that invest at least 80% of their assets in a single country or region,
excluding South Africa, at all times. These unit trusts are created out of the same offshore fund
“pool” created via the allowance described above.
As with funds in the Unclassified sectors, investors must exercise caution when comparing
Regional funds. This is because a single Regional sector (eg, Regional–Equity–General) may
contain funds investing in very different geographical areas. A Japan fund, a USA fund and a
Eurostoxx fund, for example, are not comparable in the same way as South
African–Equity–General funds. Where the latter will reveal differences in fund management
approach and ability, the former will be largely dependent on the performance of stock markets in
those respective countries. For this reason, ASISA discourages ranking of funds in Regional
sectors.

Second and Third Tiers
At the second level, funds are divided into four main groupings: Equity Funds, Multi Asset
Funds (previously Asset Allocation), Interest Bearing Funds (previously Fixed Interest) and Real
Estate Funds.
Equity Funds are funds that are obliged to invest a minimum of 80% of their assets
(previously 75%) in equities at all times. The remaining 20% can be invested, subject to the
mandate of the fund, at the discretion of the fund manager. There are seven sub-sectors in this
category, making up the third level of classification. Some examples of these sub-sectors (dealt
with more fully below) are Large Cap Funds and Resource Funds.

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