Page 82 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 4

Although investment policies are defined in the deed, the industry uses mandates to define
objectives and parameters more narrowly (CISCA allows a fairly broad definition of investment
policies in the deed). ASISA describes the mandate as a “definitive document reflecting the fund’s
main characteristics and a signed commitment of both the management company and asset
manager”.
In preparing a mandate, a CIS manager must propose a fund classification in terms of ASISA’s
classification structure, but this is subject to ASISA approval. Other information that must be
defined in the mandate includes:
A concise statement of the fund objectives
The investable universe of the fund, which includes a definition of the asset class or classes
of the fund (eg, equities, multi asset or interest bearing)
The benchmark of the fund (only one, clearly defined benchmark is accepted by ASISA)
Fund limits and constraints (eg, whether the fund invests only in SA or only offshore)
Type of fund (retail or institutional)
Nature of the fund (index fund, fund of funds, multi-manager, general or “other”)
Details of the portfolio manager
A fund’s mandate will often include specific constraints limiting the investment universe to
particular types of shares, or limiting exposure to certain types of assets. In order to qualify for
membership of a particular ASISA category, the constraints in the fund’s mandate must obviously
conform to the requirements of the category as laid down by ASISA (see chapter 8 which deals
with classification).

Discretionary Fund Managers
A discretionary fund manager (DFM) creates and manages portfolio investments on behalf of
clients. A DFM is not a CIS management company but an FSP. The rise of DFMs, however,
illustrates the overlap of portfolio management and discretionary advice and shows how easily the
demarcation gets blurred and confuses investors.
This blurring is particularly evident in comparing a multi-manager fund to a DFM.
A multi-manager fund is typically a unitised collective investment scheme, whereas a DFM
manages a portfolio of underlying funds on a per-client basis using a consistent set of advice and
risk management principles. This means, in practice, that similar clients will often invest in similar
or identical model portfolios – which makes the DFM offering look much like a selection of
multi-manager funds even though they operate under different rules.
The rise of discretionary fund management is linked largely to the FSCA’s RDR (Retail
Distribution Review), which is modelled on the UK’s RDR. The ever-increasing regulatory
demands make it difficult for independent advisors to fulfil the many requirements of a compliant
investment process; this situation has created an opportunity for DFMs.
Under RDR, financial advisors are required to have a ‘centralised investment proposition’
(CIP). This follows the principle of consistent client outcomes, which seeks to overcome legacy
practices where advisors chose products for clients based on idiosyncratic factors. A CIP approach
means that advisors have to be able to demonstrate how client needs were assessed and why
recommendations were made, a responsibility that is daunting for many advisors.
An advisor working in conjunction with a DFM is able to use the DFM’s systems in the
assessment process and rely on the DFM for the applicable portfolio model. As a specialist in
discretionary advice, the DFM provides experts, tools and a range of wrappers or model portfolios
that can be applied to meet desired outcomes.

ASISA
The Association of Unit Trusts (AUT) was established in 1967 to represent the interests of
South African unit trust management companies and their investors. The primary aim of the
Association was to facilitate the development and growth of the industry.

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