Page 152 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 8

White Label Funds
A white label (or ‘third-party’) fund is marketed under the name of a ‘third party’ but is
managed by a licensed unit trust management company. White label funds arise
because it can be difficult and costly to acquire a unit trust license from the FSCA.
Some white label funds are run by experienced asset managers who are too small to register with
the FSCA. These funds may become fully-fledged Management Companies in time (eg, Allan Gray
started without its own unit trust license).
Many white label funds are set up by brokers and financial advisors. For a broker, a white label
fund reduces client consultation (because the client agrees to the mandate of the white label fund,
and the fund can make investment changes without consulting the client). Usually, the brokerage
also receives a portion of the annual management fees, thereby improving returns for the
brokerage without necessarily charging trailer fees. White label funds also have brand marketing
benefits.
Since 2012 it has been mandatory for the name of a white label fund to incorporate the name of the
licensed manager (eg, in the case of Dotport BCI Flexible FoF, “BCI” stands for Boutique
Collective Investments).

In contrast to the rules governing funds in the Interest Bearing sectors, funds in the Multi Asset
Income sector have few restrictions on the type of income yield assets in which they can invest.
These portfolios are allowed a maximum effective equity exposure (including international
equities) of 10% and maximum listed property exposure of 25% (again, including international
holdings).
There is no official ASISA benchmark for the Income funds sector. Benchmarks vary, with the
STeFI being the most popular (periods used differ). The All Bond index (Albi) is used as a
benchmark by several funds.

Interest Bearing Funds
Funds in the Interest Bearing sector (previously known as Fixed Interest) invest exclusively in
bond, money market investments and other interest-earning securities. These portfolios may not
include equities, listed real estate shares or cumulative preference shares.
Before 2013, this category contained three sub-sectors: Money Market Funds, Income Funds
and Bond Funds. The Money Market Funds sector was preserved under the revised classification,
but the Varied Specialist sector and Bond Funds sector were renamed respectively to Short Term
Funds and Variable Term Funds. This was done to better reflect the varying risk/return
characteristics of interest bearing funds, which are sensitive to the level of interest rates in the
economy and the shape of the yield curve. Unlike Money Market funds, both Short Term and
Variable Term funds carry the risk of capital losses.
The problem with the previous sector names was that bond funds are used predominantly by
investors wanting interest income but the sector name did not necessarily reflect this. The new
sector names better reflect the fact that both categories offer interest income but differ in their
risk/return characteristics.
Note that a Short Term category fund is permitted to hold bonds provided the fund as a whole
conforms to the average duration limitation of the sector. Although bonds are issued with long
repayment periods (typically from 10 to 30 years) their risk/return characteristics change as they
approach maturity. As a rule, a fund with a longer average duration will achieve higher interest
income than a fund with a short average duration. This is because long-dated bonds offer higher
interest rates to compensate investors for the greater risk of capital loss (the longer-dated a bond,
the more sensitive its price to changes in market interest rates). This is not true when the yield
curve is inverted, which can happen before a recession.

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