Page 147 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Classification of CISs

Considering that the smallest fifty JSE companies have a combined market cap of well under
R5bn, companies worth R100bn on average are not that small.
Benchmarks for these funds vary. The most common is a combination of small and mid cap
indices, but some CIS managers use the FTSE/JSE All Share index, and the median performance of
funds in the sector is also used. The ASISA benchmark for this sector is the FTSE/JSE Mid Cap
index (J201T).
Resources Funds
Resources funds seek capital appreciation by investing in shares of companies engaged in the
exploration, mining, distribution and processing of metals, minerals, energy, chemicals, forestry or
other commodities. At least 80% of assets must be in shares listed in the FTSE/JSE Oil & Gas and
Basic Materials industry groups (or, for non-SA funds, in a similar sector of an international stock
exchange). Up to 10% of assets may be invested in shares in other sectors provided the companies
conduct similar business activities as those in the defined sectors. Examples of these might be
food-type commodity shares, or companies like PPC, a cement company listed in the JSE Building
& Construction Materials sector.
The performance of mining and resources funds is generally linked to commodity prices and world
GDP growth. In South Africa, foreign exchange fluctuations (ie, the relative strength of weakness of
the rand in relation to other currencies) adds a second layer onto the performance of the sector. Some
fund managers add performance to their funds by “derivative hedging” (ie, selling short) if the
resources index is going down. Individual resource categories tend to have different cyclical patterns,
which have to be managed by the fund managers to the best advantage of the fund. For the
SA–Equity–Resources sector the ASISA benchmark is the FTSE/JSE Resources index (J258T).
Gold Funds
Gold funds, which once had their own sector, are now classified elsewhere. The decline of
South Africa as one of the world’s leading suppliers of gold has been accompanied by diminishing
interest in these funds.
The gold mining industry in SA has consolidated dramatically over the last decade. There are
currently only a handful of JSE listed stocks, reduced from over 60 some 20 years ago. This has
made it increasingly difficult for gold fund managers to stick to regulations which limit investment
in any one company – especially as the gold sector is dominated by four companies, Anglogold,
Gold Fields, Harmony and Sibanye, which make up over 95% of the JSE Gold Mining sector. In
1999 gold fund managers successfully petitioned the FSCA to exempt them from regulations that
restrict investment in any one company to a maximum of 10% of the fund. At the end of June 2021,
the portfolio of the only rand-denominated gold fund was 31% invested in AngloGold and 27% in
Goldfields.
Gold funds perform well when the gold price is rising or expected to rise. Overseas there are
ETFs that invest directly in gold bullion, and both ETFs and mutual funds that invest in gold
mining companies. These funds offer exposure to major international gold miners like Newmont
and Barrick as well as South African counters.

Financial Sector Funds
These theme funds invest in financial sector companies, including banks, insurance companies,
brokerage firms and other companies whose principal business operations involve the provision of
financial services.
For funds in the SA–Equity–Financials sector, at least 80% of assets must be invested in shares
listed in the FTSE/JSE Financials industry group (or in a similar sector of an international stock
exchange for non-SA funds). Up to 10% of assets may be invested in shares that are not listed in
the Financials sector provided the companies have business activities in line with the theme. Due
to the narrower focus of these funds they may be more volatile than better diversifed portfolios.
For funds in the SA–Equity–Financials category the ASISA benchmark is the FTSE/JSE
Financials index (J580T).

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