New category for Allan Gray Balanced Fund due to ACI changes
Because of recent changes to the way the Association of Collective Investments (ACI) classifies unit trusts the Allan Gray Balanced Fund has been moved to a new ACI category.
“Correctly classifying funds helps investors understand the various fund types to select the right one for their needs. It also helps investors, financial advisers and the industry compare funds both within and across the different categories.” says Johan de Lange, Director of Allan Gray Investor Services.
The ACI continuously reviews fund classifications and from time to time updates its categories in line with changes in the market. The first level of classification divides funds into those that invest primarily in local markets (domestic), those that invest primarily in foreign markets (foreign) and those that invest in a mix of the two (worldwide). Funds are then broadly categorised according to the type of investments they may hold – such as equities, bonds and other fixed interest instruments, and property.
The Allan Gray Balanced Fund falls into a broad group of funds called ‘asset allocation’ funds as it may invest in a mix of different asset classes.
The ACI classifies asset allocation funds according to whether or not they adhere to legislation governing retirement funds – specifically Regulation 28 of the Pension Funds Act. Those that do comply with Regulation 28 are known as ‘prudential’ funds and are considered suitable investment vehicles for retirement funds.
Asset allocation funds are further divided according to the amount of equities their portfolios may hold. According to the categories that were in place before the recent changes, the ACI allowed for low, medium and high levels of equity exposure. Prior to 1 January 2008, the Allan Gray Balanced Fund fell within what was known as the Domestic Asset Allocation, Prudential Medium Equity category.
As part of the recent changes, the stated ACI actual equity exposure limits (including international equity) for this category are now “between 40% and 65% at all times”. At the same time, the ACI has introduced a new category – the Prudential Variable Equity category – that allows for substantial flexibility in terms of the amount of equity exposure a fund may have. Its requirements state that portfolios classified in this category “would have an equity exposure (including international equity) of between 0% and 75% at all times”.
To retain flexibility in respect of equity exposure limits as of the 1st of January 2008, the Allan Gray Balanced Fund has now moved to the Prudential Variable Equity category, along with a large number of other funds previously in the Prudential Medium Equity category. The funds’ past performance history will be retained in the newly created category.
“In order to ensure there is no change to the way we manage the Allan Gray Balanced Fund, we needed more investment freedom and a greater flexibility with regard to equity exposure than the new Prudential Medium Equity limits allow,” says de Lange.
Due to the broad limits of the new category (“the underlying risk and return objectives of individual portfolios may vary as dictated by each portfolio mandate and stated investment objective and strategy”), ranking of funds within the Prudential Variable Equity category is not appropriate.
The Allan Gray Balanced Fund’s benchmark was previously the average of the funds in the category (excluding itself). To ensure that the benchmark for the Allan Gray Balanced Fund remains as consistent and representative as possible the benchmark is now based on the average of all funds in both the Prudential Medium Equity category and the Prudential Variable Equity category (excluding the Allan Gray Balanced Fund).
“Benchmarks provide investors with a yardstick against which they can evaluate their fund’s performance, therefore it is important to ensure that the benchmark selected for a particular fund is relevant and appropriate and is as consistent as possible regardless of ACI category changes,” de Lange concludes.
