Page 147 - Profile's Unit Trusts & Collective Investments - March 2025

Classification of CISs

Regulation 28 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 3 January 2023, 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.

this – plus the large degree of discretion enjoyed by fund managers in this sector – means that a
wide range of risk/return characteristics are found across Flexible funds.
For many people, flexible funds are regarded as the greatest test of asset management ability.
Subject to mandate constraints, the manager of a flexible fund has complete freedom to determine
(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 Basis Point
according to differing levels of risk – from an investor’s A basis point is one
point of view, a fund in the Low Equity sector is regarded as one-hundredth of 1%. Basis
less risky than a fund in the Medium Equity category, which points are used to express
in turn would be seen as less risky than a fund in the High interest rate changes and yields that are
Equity sector. less than one percent; one percent
equals 100 basis points. A move in a
The High, Medium and Low Equity sectors all restrict bond yield from 10.96 to 10.97 is a one
property exposure (ie, holdings in listed property shares) to basis point move.
a maximum of 25% of assets. This includes exposure to
international property.
In addition, the sectors have the following equity exposure ceilings:
High Equity funds may have a maximum effective equity exposure (including international
equity) of up to 75%;
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%.

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