New ASISA Fund Classification System
By Wade Witbooi, Investment Analyst at Glacier by Sanlam
As from 1 January 2013 all funds in the South African unit trust industry will be categorised according to the new fund classifications introduced by the
Association for Savings and Investment South Africa (ASISA). CEO of ASISA, Leon Campher, said it has been a process of three years to review the
previous classifications set out in 2008. “Not only did we have to ensure complete buy-in from our members, but we also had to test the proposed new fund
classification structure with the Financial Services Board (FSB) since they regulate collective investment schemes against our fund classes,” said Campher.
Why the change?
The collective investments industry dates back to 1965 when there were only two funds and two management companies. The expansion of the industry has
been quite robust, growing from 107 funds in 1996, to nearly 1000 funds today. Clearly the nature of the industry has changed substantially since the
inception thereof and improved measures are needed when segmenting the universe of funds. Today the industry is filled with funds which invest across
many geographical regions, asset classes, market segments, and investment style biases. According to ASISA, they have gone about a reclassification
exercise to aid investors when choosing appropriate funds, understanding and analysing various fund types, comparing the performance of funds within and
across categories, and to promote investor awareness and understanding.
What’s changing?
ASISA has introduced a three tier classification system whereby tier one will segment the funds according to their geographical investment universe, tier two
will address the type of assets which the fund may invest in, and tier three will address the main focus of the fund. An example would be a typical “Balanced”
fund; previously it would be classified as “Domestic – Asset Allocation – Prudential Variable Equity,” and will now be classified as “South African – Multi Asset
– High Equity.” The new classifications have also given ASISA the opportunity to rename the different tiers in an attempt to demystify the subsector. For
example, in the first tier, “Domestic” has been changed to “South Africa,” in the second tier “Asset Allocation” has been changed to “Multi Asset,” and in the
third tier “Variable Equity” has changed to “High Equity.” All the changes are detailed in the tables below:
As indicated above, some categories have been either done away with altogether, or integrated into existing subcategories. One of the changes sees the
Fixed Interest Varied Specialist category being discontinued. The new classification system will see the majority of those funds move to the Multi Asset
Income category whereby they may now hold a maximum of 10% equity and 25% property exposure. This new category will enable investors who seek a
fund with a majority holding in interest bearing instruments to benefit from the diversification of a maximum holding of 10% in equities and 25% in property.
Another category which will cease to exist as from 1 January 2013 is the Asset Allocation Target Absolute and Real Return category. This category was
created for funds designed specifically to provide returns in excess of inflation, while producing no negative returns over a stipulated period (e.g. rolling 12
months). As the category name describes an investment style rather than describing the securities which it may hold, this category was also collapsed, in
keeping with ASISA’s philosophy to promote investor understanding. Funds previously within this category will mainly move to the Multi Asset Flexible
category, but could be in other categories depending on the fund’s investment mandate.
Two subcategories within the Equity category have also fallen away, namely: Equity – Value and Equity – Growth. Funds previously housed in these two
categories will be moved to “Equity – General” under the new classifications. This move is also in keeping with ASISA’s philosophy of promoting investor
understanding as it removes the bias for categorisation according to investment style and focuses on underlying investment instruments. “Value” funds
traditionally seek to invest in shares trading at a discount to their net asset value, low price-to-earnings (P/E) ratios, and a dividend yield superseding that of
the market. “Growth” funds on the other hand invest in shares trading on high P/E ratio multiples and whose earnings are in or are anticipated to enter a
strong and sustainable upward trend. Although these funds will be classified as “General,” their philosophies of Value or Growth will remain.
Other noticeable changes include the amalgamation of the Asset Allocation High and the Asset Allocation Variable equity portfolios. These funds will
continue in the new Multi Asset High Equity category with the same investment limit imposed of a maximum weighting of 75% in equities (including
international equity) and 25% in property (including international property).
The “Real Estate General” category will continue under the same name, but the minimum exposure to property will change. Previously funds only had to
have a minimum exposure of 50% in listed property, but as from 1 January 2013 the minimum exposure will be increased to 80%. In addition, these funds
may now invest up to 10% in companies which conduct similar property related business activities.
ASISA has chosen to rename the “Fixed Interest” category under tier 2 to “Interest Bearing,” with investor clarity at the forefront. The renaming of the
categories within tier 3 (as in the table) once again serves to enlighten the investor, in this case, as to the average term to maturity of the underlying securities
held.
A new category in tier 1 will be instituted namely, “Regional.” These funds will invest a minimum of 80% in a specified geographic location (e.g. Asia, Europe,
Africa). “Domestic” funds will be reclassified as “South African.” These funds may now have a minimum exposure of 70% in South Africa (previously 75%), a
maximum of 25% offshore, and a maximum of 5% invested in African markets. “Foreign” funds will now be classified as “Global” funds, and they will have to
adhere to a minimum weighting of 80% of their assets invested outside South Africa at all times, with an 80% maximum weighting per geographic region.
How does this affect the investor?
Other than seeing a different fund classification on fund fact sheets, there will not be automatic changes in the investment policy of the fund. In essence, the
fund you bought into will not operate under a new mandate. If the management company would like to make changes to the investment mandate to better
position the fund in its new category, they would need to ballot all investors within the fund. The outcome of the ballot will be dependent on whether the
majority of investors are in favour of, or against the proposed changes.
Concluding comments
ASISA has taken a step in the right direction. They have sought to align our fund classification system with international definitions and done so primarily with
the investor in mind. An important consideration for investors to take note of is that even though the categories are now more understandable, it doesn’t imply
that one can assume a one size fits all methodology when investigating the constituents. Although the category name is the same, it does not mean the
funds are all managed the same way. Investment houses, portfolio managers, and investment analysts all do research with a robust investment philosophy
entrenched in their valuations and processes. It is of paramount importance to understand the philosophy of a fund especially when investing within a
category that could contain various investment styles. With the new classifications in operation from 1 January 2013, it could be a good time to review your
investment funds and understand how they are positioned under the new classification system.
Source: ASISA fund classification standard
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Contact details
Wade Witbooi
Glacier by Sanlam
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