Page 137 - Profiles's Unit Trusts & Collective Investments - September 2024

Classification of CISs

Chapter 8
Classification of CISs
Classification of CISs

NQF
Relevant to
Collective investment schemes (CISs) are grouped into sectors to enable 242594: 3, 4
investors to compare funds with similar objectives and comparable 242612:1-3
243130: 1
benchmarks in terms of performance, risk and other measures. The 243147: 2
classification standard is devised and maintained by ASISA and reviewed and 243148: 3
243155: 1
adjusted from time to time to accommodate developments in the collective
investments industry.
Classification systems for collective investments are very important when it comes to
identifying which fund managers outperform their peers both locally and globally. Performance
rankings are only meaningful when funds can be compared fairly.
Similarly, if investors choose a suitable asset allocation, they need to be able to identify the
funds in a category and be sure that those funds have similar mandates and are comparable.
Early classification systems were simple as there were much fewer funds. At the end of 1995,
for example, there were just 88 South African funds in four main categories: General Equity (24),
Specialist Equity (41), High Income (16) and Gilt (7). Only the Specialist Equity category had
sub-sectors: Mining and Resources (7), Gold (2), Industrial (4), Balanced/Managed (10), Index
(4), Industrial (6), and Other Specialist Equity (8).
The classification system was revamped in July 1999. A three-tier structure was introduced
which applied the “where and what” standards used in the UK and US. The first tier (domicile of
assets, the “where”) consisted of Domestic, Worldwide, Foreign and Regional categories. (The
Regional category was dropped in 2005 but was reintroduced in 2013.) The second and third tiers
(asset allocation and specific focus respectively) provided the “what”: equities, asset allocation or
“fixed-interest” at the second level, and more specific sub-sectors – such as Large Cap under Equity
or Money Market under Fixed Interest – at the third level. Not all sector permutations actually
existed – a category was only created when there were a sufficient number of funds to populate the
sector. Although a Regional-Asset Allocation-Flexible category was theoretically possible, for
example, no such funds operated in South Africa at the time.
Although the 1999 revision of sectors largely achieved its objective, from the outset categories
were introduced which deviated from the “what” principle. At the third tier for Equity funds, for
example, the standard provided for both gold funds and empowerment funds, but where the
former clearly defined what the fund invested in, the latter was based on who owned the underlying
assets. Similarly, in the Asset Allocation category, the Prudential sector was based not principally
on what funds invested in but on whether they were Regulation 28 compliant – hence the first
iteration of this category lumped together funds with widely divergent equity exposures.
January 2013 Revision
The 2013 revision of the ASISA classification standard was, in the main, designed to restore the
“where and what” principle to the sector structure. Funds are now strictly classified according to
geographic exposure and underlying assets. Categories which, under the previous standard, had
been created mainly for marketing reasons, have been eliminated – this includes the style sectors
(Value and Growth) and the prudential sectors.
It is important to note that the classification standard is not designed to cover all types of unit
trusts and collective investment schemes, only to group funds in such a way that they are
comparable in terms of risk and performance. Funds of funds (FoFs), for example, do not have
their own sector because a FoF represents a method of holding assets, not a defined investment
universe or a limitation on asset allocation. FoFs can be found in several Equity sectors, in most of
the Multi Asset sectors, and even in the Interest Bearing sectors.

Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts 135