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

Classification of CISs Chapter 8

ILLAs and Preservation funds
A retirement annuity (RA) is a tax-deductible retirement funding vehicle (ie, a savings plan
towards retirement). A preservation fund is an approved vehicle for holding the proceeds
of a pension or provident fund until retirement (eg, when changing jobs). An ILLA is an
investment-linked living annuity which may be established at retirement age. Unlike a traditional life
annuity, which pays a fixed monthly amount during retirement, an ILLA allows the investor to draw
against income and/or capital in a flexible way. ILLAs are attractive because the capital amount forms
part of an investor’s estate, whereas the rights to a life annuity die with the investor (or the second
of joint annuitants). A major problem with ILLAs, however, is capital erosion where the retirement
lump sum is too small to produce sufficient income to satisfy the retiree’s monthly needs. Most LISPs
offer RAs, ILLAs and preservation fund products which allow investors to select underlying unit trusts
provided that in the case of RAs and preservation funds, the aggregate exposure by asset class conforms
to Regulation 28.
As mentioned earlier, some Income Funds, which previously fell under the Interest Bearing (then
Fixed Interest) category, were moved to Multi Asset under the 2013 revision. This is because some
income funds can, mandates permitting, invest a portion of assets in high dividend shares or other
instruments that cannot strictly be defined as interest-bearing securities.
Flexible funds
Flexible funds invest in a combination of securities in the equity, bond, money and listed property
markets. They are often aggressively managed, and most flexible fund mandates allow the fund
manager to shift holdings from one asset class to another at any time. Managers of Flexible
funds seek to maximise total returns by favouring different asset classes at different times based
on prevailing economic and market conditions (eg, moving predominantly into interest bearing
securities during a stock bear market). The mandates of Flexible funds can vary significantly, and
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 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 a maximum of 25% of assets. This includes exposure to international property.
In addition, the sectors have the following equity exposure ceilings:
R High Equity funds may have a maximum effective equity exposure (including international
equity) of up to 75%;
R Medium Equity funds may have a maximum effective equity exposure (including international
equity) of up to 60%; and

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