Page 149 - Profile's Unit Trusts & Collective Investments - March 2025

Classification of CISs

White Label Funds
A white label (or ‘third-party’) fund is marketed under the name of a ‘third party’ but is
managed by a licensed unit trust management company. White label funds arise because
it can be difficult and costly to acquire a unit trust license from the FSCA.
Some white label funds are run by experienced asset managers who are too small to register with
the FSCA. These funds may become fully-fledged Management Companies in time (eg, Allan Gray
started without its own unit trust license).
Many white label funds are set up by brokers and financial advisers. For a broker, a white label
fund is easier to manage because the investor agrees to the mandate of the white label fund, and
the fund can make investment changes without consulting each investor. Usually, the brokerage
also receives a portion of the annual management fees, thereby improving returns for the
brokerage without necessarily charging trailer fees. White label funds also have brand marketing
benefits.
Since 2012 it has been mandatory for the name of a white label fund to incorporate the name of the
licensed manager (eg, in the case of Dotport BCI Flexible FoF, “BCI” stands for Boutique
Collective Investments).

As of October 2024 funds that invest predominantly in inflation-linked bonds have been
classified in the Variable Term ILB Funds sub category. There will also be a category for
Unclassified Funds.
Bond funds, inflation-linked bond funds and income funds are used predominantly by investors
wanting interest income but unlike money market funds, income, bond and inflation-linked bond
funds carry the risk of capital losses. The previous sector names did not reflect the risk of capital losses.
The new sector names better reflect the fact that all three categories offer interest income but differ in
their risk/return characteristics.
Note that a Short Term category fund is permitted to hold bonds provided the fund as a whole
conforms to the average duration limitation of the sector. Although bonds are issued with long
repayment periods (typically from 10 to 30 years) their risk/return characteristics change as they
approach maturity. As a rule, a fund with a longer average duration will achieve higher interest
income than a fund with a short average duration. This is because long-dated bonds offer higher
interest rates to compensate investors for the greater risk of capital loss (the longer-dated a bond,
the more sensitive its price to changes in market interest rates). This is not true when the yield
curve is inverted, which can happen before a recession.
Short Term Funds
Funds in the Interest Bearing – Short Term sector invest in bonds, fixed deposits and other
interest-based instruments which have fixed maturity dates and either a predetermined cash flow
profile or benchmark-linked yields. To provide a degree of capital stability, the weighted average
modified duration of the underlying assets is limited to a maximum of two years.
These funds, which offer a periodic, high level of income, are typically less volatile than those in
the Variable Term sector. The majority of funds in the sector distribute income either quarterly or
monthly, although one or two only pay out once or twice a year. A common benchmark for the
South Africa–Interest Bearing–Short Term sector is the STeFI Composite index.
Variable Term Funds
Funds in the Interest Bearing – Variable Term sector (the bond funds) are permitted to invest in
the broadest range of Interest Bearing instruments, including bonds, fixed-deposits and other
interest-based securities. These funds may also invest in short, intermediate and long-dated
instruments – no limit is placed on the average duration of portfolios. Funds in this sector actively
manage a mix of underlying investments in order to achieve the best combination of interest yield
(income) and capital performance. The mix of assets and the average duration of a fund may
fluctuate considerably over time depending on the manager’s assessment of interest rate trends. The
majority of funds in the sector distribute income either quarterly or half-yearly. These funds offer the

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