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