Getting to grips with the new ASISA fund classification
01 October 2012
Johan Steyn, Prescient
Some investors and advisers find the current Association for Savings and Investment South Africa (ASISA) unit trust classification a touch confusing. One of the criticisms is that collective investment schemes are categorised according to vague characteristics such as investment style. An overhaul of these naming conventions is long overdue...
One of the stated objectives of the ASISA fund classification is to facilitate appropriate fund comparisons. It is, therefore, not surprising that investors and advisors compare fund performance within particular sector groupings. However, the vast difference in asset allocation and geographical exposure between funds within certain sub-categories makes fund comparisons almost impossible.
Comparing apples with pears
Within the Fixed Interest Varied Specialist category, for example, you may have to compare a fund with more than 40% exposure to a volatile asset class like Real Estate, to a fund predominantly invested in less risky, diversified income bearing assets. This works against the objective of facilitating useful intra-category comparisons.
The focus on investment style as a basis to divide unit trusts funds into categories is wholly without merit. The growth and value equity classifications, for instance, are not clearly defined. Many funds in the Equity Value category have share selections that look suspiciously like growth shares and vice versa.
To make matters worse, there are genuine Equity Value funds that do not appear in the Equity Value category at all. Instead they appear in the larger Domestic Equity General category, where they are measured against popular heavy-weight equity funds. Fund managers hoped to attract additional capital inflows by achieving a favourable short term performance comparison against the popular funds.
An inherited system
The fund classification inherited from the old Association of Collective Investments (ACI) in 2008 had a number of shortcomings. As a result asset management companies have "worked” the system to curry favour among investors and, to some extent, choose the peers they will be compared to.
Against this backdrop ASISA’s recent announcement of a new fund classification standard is very welcome indeed. Selecting and comparing funds should be much easier after January 2013 when the new classification comes into effect.
Labelling by location
The new structure does away with classifying funds according to investment style. Instead, they will be grouped based on geographic exposure and underlying assets, including equities, bonds, cash and property.
At the highest level ASISA has added an extra first tier classification called Regional Portfolios. These funds have 80% of their assets invested outside South Africa, in a specific region, including Africa.
The Foreign classification will change to Global, with the added caveat that no more than 80% of fund assets can be in a specific geographical region; hence the inclusion of the Regional category.
Strict income definitions
The interest-bearing sector becomes stricter in its definition for inclusion. Only funds that invest exclusively in bond, money market or interest earning securities will be included in this section. These portfolios may not include equity, real estate or preference shares. As a result, the Fixed Interest Varied Specialist category disappears.
Most of these diversified income funds will move to the new multi asset income category, where they will have to comply with the 10% exposure limit to equities and 25% in property.
Prudential funds fall away
Categories will no longer be explicitly identified as compliant with Regulation 28 of the Pension Funds Act. This was previously indicated with the word "prudential” in the category name. Funds that do not comply with Regulation 28 will fall into the Flexible category, which is not subject to the 75% equity constraint.
The implication of the new classification for advisors and multi-managers is that it will become significantly easier to select unit trusts and compare their performances within categories. It will also help investors to better understand and analyse the various types of funds available to them.
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