Page 143 - Profile's Unit Trusts & Collective Investments - March 2025

Classification of CISs

What are Shari’ah Compliant Funds?
Shari’ah compliant funds observe the laws of “Islamic Finance” by applying strict
ethical rules to their investment activities. For example, Shari’ah funds may not invest in
companies which make money from gambling, alcohol, pornography, pork products or
military equipment. Earning interest, or riba, which is considered an unjust unearned gain, is
forbidden under Shari’ah, and a fund which inadvertently earned interest would be required to
donate this to charity. Running a Shari’ah compliant fund is fairly onerous: all investments have to be
carefully screened and audited by a Shari’ah supervisory boardmadeupof recognisedauthorities.
The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) was created in
1990 to set compliance standards for entities that wish to operate in accordance with Shari’ah.

Large Cap Funds
These are funds that seek long-term growth through investment in the shares of companies
with very large market capitalisations. At least 80% of assets must be invested in large cap shares
and 100% of share purchases must be in this investable universe at time of purchase. For the
SA–Equity–Large Cap sector, large cap companies are those that fall within the top 40 JSE listed
shares by market capitalisation (or, shares which have a market capitalisation greater than or equal
to the company with the lowest market capitalisation in the FTSE/JSE Top 40 index). Currently,
most of the SA Large Cap sector funds are index funds tracking the top 40 or 50 shares on the JSE.
These are passive funds. An actively managed large cap fund seeks to outperform its benchmark.
The ASISA standard makes provision for other large cap sectors (such as Global–Equity–Large
Cap or Worldwide–Equity–Large Cap) but there are currently insufficient funds to warrant such
categories. A large cap fund that is not in the SA–Equity–Large Cap sector would have to invest in
shares of an appropriate foreign index published by a recognised exchange. For example, the
Global–Equity–Unclassified sector currently contains a fund that tracks the Dow Jones Euro
Stoxx 50 index. This is effectively, therefore, a large cap fund which invests in 50 of the largest,
blue-chip European companies operating within eurozone nations (excluding the UK).
Mid & Small Cap Funds
Funds is this sector (previously called Smaller Companies) invest in established mid cap
companies as well as in emerging companies that are in the initial phase of business growth. New
investment by the funds is restricted to shares that fall outside of the top 40 JSE shares (or in
shares which have a market capitalisation smaller than the company with the lowest market
capitalisation in the FTSE/JSE Large Cap index, or an appropriate foreign index published by an
exchange). At least 80% of the fund must be invested in this universe at all times. Due to both the
nature and focus of these funds, they may be more volatile than funds that are diversified across
the broader market.
New investment by funds in this category is restricted to small and mid cap shares, but if a fund
holds a share that increases in value to the point that it becomes a constituent of the Alsi40, the
fund manager is not obliged to sell the share (provided that it does not constitute more than 20%
of the fund’s assets).
In JSE terms, mid cap shares are not particularly small – the FTSE/JSE Top 40 and the
FTSE/JSE Mid Cap index (together approximately the top 60 shares of around 290) account for
90% of the total market cap of the JSE, with the other 230 shares making up less than 10%.
Theoretically, a Mid & Small Cap fund could invest entirely in mid cap shares (without
contravening the fund’s mandate), which would mean companies with market caps averaging
around R25bn.
Considering that the smallest 50 JSE companies have a combined market cap of under R6bn,
companies worth R100bn on average are not that small.
Benchmarks for these funds vary. The most common is a combination of small and mid cap
indices, but some CIS managers use the FTSE/JSE All Share index, and the median performance of
funds in the sector is also used. ASISA no longer publishes benchmarks for the unit trust
categories, but previously it used the FTSE/JSE Mid Cap index (J201T).

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