Page 147 - Profiles's Unit Trusts & Collective Investments - September 2024

Classification of CISs

Regulation 28 “Prudential“ Funds
Regulation 28 of the Pension Funds Act stipulates prudent investment limits that must
be adhered to by managers of retirement funding vehicles (such as pension funds,
provident funds and RAs). The Regulation 28 rules also apply to unit trusts and other
collective investment schemes that wish to attract retirement savings. A revised Regulation 28,
which became effective on 1 July 2011, introduced some important changes for pension funds, as
shown in Chart 8.1. It is important to note that the FSCA regulations governing collective investment
schemes take precedence over Regulation 28. For example, although Regulation 28 now allows
pension funds and other retirement vehicles to invest directly in commodities, FSCA rules do not
allow unit trusts to do this. However, where a Regulation 28 limit is more restrictive than the FSCA
regulations governing unit trusts, a prudential fund would have to comply with Regulation 28. As
one fund manager puts it, where more than one code is applicable, the fund manager must always
apply the more stringent rules.
It should be noted that the “prudential” environment extends beyond those funds flagged as
Regulation 28 compliant. Most LISPs offer wrappers and other retirement products that allow
investors to select from a range of unit trusts – in order to meet prudential requirements the
aggregate exposure to each asset class across the consolidated portfolio must comply with
Regulation 28. Regulation 28 compliant funds may or may not form the backbone of a retirement
funding strategy; a “prudential” portfolio can also be constructed by combining different types of
funds – money market, multi asset, equity and bond funds – within a retirement wrapper.
(and change at short notice) the asset allocation of the fund. Good flexible fund managers are
generalists, with a good understanding of all types of markets and how they respond to different
economic factors. This broad knowledge allows the manager to decide when to be overweight in
equities and underweight in bonds, or vice versa.
Benchmarks vary in the Flexible category. Peer group comparisons are the most popular, but
CPI, composite benchmarks and the FTSE/JSE All Share index are also used.
High, Medium and Low Equity Funds
Like Flexible funds, these multi-asset portfolios invest in the full spectrum of assets classes:
equities, bonds, money market securities and listed property stocks. The key difference is the limit
placed on equity exposure in each category. On the assumption that equities are usually the most
volatile asset class, these categories seek to group funds together according to differing levels of
risk – from an investor’s point of view, a fund in the Low Equity sector is regarded as less risky
than a fund in the Medium Equity category, which in turn would be seen as less risky than a fund
in the High Equity sector.
The High, Medium and Low Equity sectors all restrict
property exposure (ie, holdings in listed property shares) to Basis Point
a maximum of 25% of assets. This includes exposure to A basis point is one
international property. one-hundredth of 1%. Basis
In addition, the sectors have the following equity points are used to express
exposure ceilings: interest rate changes and yields that are
less than one percent; one percent
High Equity funds may have a maximum effective
equals 100 basis points. A move in a
equity exposure (including international equity) of bond yield from 10.96 to 10.97 is a one
up to 75%; basis point move.
Medium Equity funds may have a maximum
effective equity exposure (including international
equity) of up to 60%; and
Low Equity funds may have a maximum effective equity exposure (including international
equity) of up to 40%.

Income Funds
The Income funds sector, previously found under the then Fixed Interest category (now
Interest Bearing), contains funds that seek to maximise income yield while at least preserving

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