Page 150 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 8

Reg 28 “Prudential“ Funds
Regulation 28 of the Pension Funds Act stipulates prudent investment limits that must
be adhered to by managers of retirement funding vehicles (such as pension funds,
provident funds and RAs). The Reg 28 rules also apply to unit trusts and other collective
investment schemes that wish to attract retirement savings. A revised Reg 28, which became
effective on 1 July 2011, introduced some important changes for pension funds, as shown in Chart
8.1. It is important to note that the FSCA regulations governing collective investment schemes take
precedence over Reg 28. For example, although Reg 28 now allows pension funds and other
retirement vehicles to invest directly in commodities, FSCA rules do not allow unit trusts to do this.
However, where a Reg 28 limit is more restrictive than the FSCA regulations governing unit trusts,
a prudential fund would have to comply with Reg 28. As Daniel Malan from RECM puts it, where
more than one code is applicable, the fund manager must always apply the more stringent rules.
It should be noted that the “prudential” environment extends beyond those funds flagged as
Reg 28 compliant. Most LISPs offer wrappers and other retirement products that allow investors to
select from a range of unit trusts – in order to meet prudential requirements the aggregate
exposure to each asset class across the consolidated portfolio must comply with Regulation 28.
Reg 28 compliant funds may or may not form the backbone of a retirement funding strategy; a
“prudential” portfolio can also be constructed by combining different types of funds – money
market, multi asset, equity and bond funds – within a retirement wrapper.

Prior to 2013 a category existed under Asset Allocation
Basis Point for Targeted Absolute and Real Return funds. Added in
A basis point is one 2003, the sector catered for funds that aimed to beat
one-hundredth of 1%. inflation or to achieve a defined minimum return. The
Basis points are used to typical benchmark of an absolute or real return fund is CPI
express interest rate changes and plus a real return target. As part of the 2013 classification
yields that are less than one percent; revision these funds were moved to other appropriate multi
one percent equals 100 basis points. A asset sectors based on their defined mandates.
move in a bond yield from 10.96 to As mentioned earlier, the Income Funds sector, which
10.97 is a one basis point move.
previously fell under the Interest Bearing (then Fixed
Interest) category, was moved to Multi Asset under the 2013
revision.Thisisbecause income fundscan,mandates permitting, invest a portion of assets in high
dividend shares or other instruments that cannot strictly be defined as interest-bearing securities.
Flexible Funds
Flexible funds invest in a combination of securities in the equity, bond, money and listed
property markets. They are often aggressively managed, and most flexible fund mandates allow the
fund manager to shift holdings from one asset class to another at any time. Managers of flexible
funds seek to maximise total returns by favouring different asset classes at different times based on
prevailing economic and market conditions (eg, moving predominantly into interest bearing
securities during a stock bear market). The mandates of flexible funds can vary significantly, and
this – plus the large degree of discretion enjoyed by fund managers in this sector – means that a
wide range of risk/return characteristics are found across Flexible funds.
For many people, flexible funds are regarded as the greatest test of asset management ability.
Subject to mandate constraints, the manager of a flexible fund has complete freedom to determine
(and change at short notice) the asset allocation of the fund. Good flexible fund managers are
generalists, with a good understanding of all types of markets and how they respond to different
economic factors. This broad knowledge allows the manager to decide when to be overweight in
equities and underweight in bonds, or vice versa.
Benchmarks vary in the Flexible catetory. Peer group comparisons are the most popular, but
CPI, composite benchmarks and the FTSE/JSE All Share index are also used.

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