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Introducing better naming conventions for unit trust categories

26 September 2012 Gareth Stokes

What are you investing in if you place you client’s funds in an Asset Allocation unit trust fund. And what financial instruments do so-called Value and Growth Equity funds house? Financial advisers and ordinary consumers have long struggled with terms such as Varied Specialist, Prudential High Equity and Targeted Absolute Real Returns when investing in the Collective Investments Schemes (CIS) industry. Something had to give!

South Africa’s CIS environment – currently boasting in excess of a trillion rand under management in 951 unit trusts funds under 42 management companies – will soon trot out a new Fund Classification Standard. From 1 January 2013 retail investors will benefit from renamed unit trust categories that better describe the underlying unit trusts based on the geographic location of investments and the underlying investment instruments. Leon Campher, CEO of the Association for Savings and Investment South Africa (ASISA) says it took the organisation three years to revise the old classification standard inherited from the then Association of Collective Investments (ACI).

More complicated than a street name change

"Not only did we have to ensure complete buy-in from our members, but we also had to test the proposed new fund classification with the Financial Services Board (FSB) who regulate collective investment scheme against ASISA fund classes,” says Campher. ASISA was formed in 2008 by members of the ACI, the Investment Management Association of South Africa (IMASA), the Linked Investment Service Providers Association (LISPA) and the Life Offices’ Association (LOA). These associations were disbanded and their staff, assets and activities transferred to ASISA.

The new naming convention is aimed at better describing the unit trust environment. Campher says where in the past the fund classification structure existed mainly for marketing purposes, ASISA and its members believe that it should provide investors with a tool to make it easier to understand exactly what they are investing in. On 7 September this year ASISA’s various committees signed off on a new standard based on three "rules”. The "recipe” for the new naming convention is fairly simple. It was agreed that the Collective Investments Schemes Control Act (CISCA) would apply as the only legislation and that the category name had to tell investors where the assets were held and what assets were permitted under the particular heading.

The so-called TIER I unit trust categories have thus been replaced with the following main categories: South African, Global, Regional and Worldwide to answer the "where” questions. And the "old” TIER II sub-categories are renamed Equity, Multi Asset, Interest Bearing and Real Estate to address the "what” aspect. The Equity and Real Estate category headings remain unchanged, although different asset class restrictions apply. Peter Blohm, senior policy adviser at ASISA, says that the new classifications should make it easier for retail investors to understand what they are investing in. He also warned that investors should not confuse the fund proliferation dilemma with fund classification. Proposals to perhaps rein in the number of unit trust funds – or stop the proliferation of funds if you prefer – are still under discussion.

Too many cooks...

What went wrong with the "old” system of fund classification? Blohm observed that the industry had changed significantly since the then Association of Unit Trusts (AUT) introduced its Code of Fund Classifications in the early 1990s. (At the time there were only 36 funds and 18 management companies). There were also too many non-investment stakeholders exerting influence on the classification process, including marketers, fund managers and regulators.

Subsequent to the introduction of the Raging Bull Awards some investment companies’ marketing departments influenced fund classification and naming conventions to improve their chances of winning certain award categories. It also became popular for asset managers to use their investment style as a differentiator… Thus investors had to choose from Value or Growth categories when both comprised investments in the JSE All Share. Subjective classifications were further affected by regulatory interventions as evidenced by the arrival of the "Prudential” label.

Zooming in on the new equity unit trust categories

We can talk through the new Fund Classification Standard for CIS portfolios by placing the Equity category under the spotlight. It was decided to do away with categories based on investment style or ill-defined sectors. From 1 January 2013 the so-called Equity Growth, Equity Value and Equity Technology categories will disappear totally. The inappropriately named Equity Varied Specialist category is renamed Equity Unclassified, while the remaining categories are tweaked slightly to represent major JSE Indices. Going forward investors can choose from Equity General, Equity Resources, Equity Financial, Equity Industrial, Equity Large Cap and Equity Mid/Small Cap. Each of these categories has new asset class restrictions.

Restrictions under the Equity Large Cap category include that 80% of the net asset value of funds be in the investible universe, described as all shares with a market capitalisation value greater or equal to the smallest constituent of the JSEA Top 40 index, or appropriate foreign stocks as published by an international stock exchange, for example.

Other changes worth noting – given local investors’ obsessions with fixed interest investments – are the change from the "old” Fixed Interest category to Interest Bearing. Subcategories include Interest Bearing – Variable Term and Interest Bearing – Short-term (for money market instruments and government or corporate bonds) as well as Interest Bearing – Money Market (only for money market investments regulated under CISCA). The requirement for Real Estate funds has been upped from 50% of assets in listed real estate to 80%.

Unit trust classifications for the New Year

Retail investors will NOT be affected by the changes except that their unit trust funds may be moved to more appropriate fund categories. Campher explains that because the new fund classification does not involve a change to the investment policy of a fund, the management company does not have to ballot unit holders before reclassifying it. The new standards take effect from 1 January 2013 and fund managers have until the end of October this year to revise their current fund classifications and fund names as well as to apply for reclassification if necessary.

Editor’s thoughts: Although we quite enjoyed the Growth and Value equity unit trust categories we agree that categorising funds based on investment style makes little sense. That fund categories and sub-categories now address the "where” and "what” of your unit trust investment is a definite improvement. Do you think the renaming of unit trust fund categories was overdue? And would you have prioritised the renaming over, for example, addressing the proliferation of unit trust funds? Please add your comment below, or send it to

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