Page 153 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Classification of CISs

About Inflation
Inflation is measured by defining a basket of goods and services used by a “typical”
consumer and then keeping track of the cost of this basket, hence the term Consumer
Price Index (CPI). The annual inflation rate is derived by determining the change in the CPI
index value of the relevant month of the current year compared with the CPI index value of the same
month in the previous year, expressed as a percentage.
The “full” basket of goods and services in South Africa historically included interest rates, fuel
prices, and other volatile or seasonally fluctuating prices. CPI is also referred to as “headline”
inflation or “overall” inflation. “Core” inflation is CPI (or headline inflation) stripped of interest rates,
fuel prices, some fresh foods, Vat, and local government rates. CPI-X (also called “underlying
inflation”) is CPI stripped of mortgage costs. CPI-X, for many years the government’s benchmark for
inflation targeting, was replaced in 2009 by CPI. Mortgage costs were replaced in the basket by
“owner’s equivalent rental” (OER), the international standard indicator for housing costs.
The weightings of the various constituents of the CPI basket can be contentious. In January 2009
Statistics SA, the official government agency, moved to a re-weighted index which immediately
lowered the official inflation rate. The revised basket reduced the weighting for food, but this may not
accurately reflect the experience of lower income groups. The index was re-weighted again in
January 2013.
The lowest inflation rate in South Africa during the last 50 years was measured in 1963 (1.0%).

Short Term Funds
Funds in the Interest Bearing – Short Term sector invest in bonds, fixed deposits and other
interest-based instruments which have fixed maturity dates and either a predetermined cash flow
profile or benchmark-linked yields. To provide a degree of capital stability, the weighted average
modified duration of the underlying assets is limited to a maximum of two years.
These funds, which offer a periodic, high level of income, are typically less volatile than those in
the Variable Term sector. The majority of funds in the sector distribute income either quarterly or
monthly, although one or two only pay out once or twice a year. The ASISA benchmark for the
South Africa–Interest Bearing–Short Term sector is the STeFI Composite index.
Variable Term Funds
Funds in the Interest Bearing – Variable Term sector (previously known as Fixed-Interest–Bond
Funds) are permitted to invest in the broadest range of Interest Bearing instruments, including
bonds, fixed-deposits and other interest-based securities. These funds may also invest in short,
intermediate and long-dated instruments – no limit is placed on the average duration of portfolios.
Fundsin thissector activelymanageamixofunderlying investments in order to achieve the best
combination of interest yield (income) and capital performance. The mix of assets and the average
duration of a fund may fluctuate considerably over time depending on the manager’s assessment of
interest rate trends. The majority of funds in the sector distribute income either quarterly or
half-yearly. These funds offer the potential for capital growth and some risk of capital loss. The
ASISA benchmark for the sector is the JSE/ASSA All Bond index (Albi).
Money Market Funds
These funds seek to maximise interest income while protecting income. They also provide
immediate liquidity. Funds in this sector invest in money market instruments with a maturity of
less than 13 months. The average duration of the underlying assets may not exceed 90 days and a
weighted average legal maturity of 120 days.
These funds are typically viewed as short-term, highly liquid investments. The funds are often
used by investors as a temporary investment or as an attractive alternative to a bank fixed-deposit
because of the higher interest rates. As described in chapter 7, Money Market funds use a system of
constant unit pricing which protects investors from any risk of capital loss.
The ASISA benchmark for South African funds is the STeFI 3-month index.

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