Page 151 - Profile's Unit Trusts & Collective Investments - September 2025

Classification of CISs Chapter 8

About inflation
Inflation is measured by defining a basket of goods and services used by a typical consumer
and then keeping track of the cost of this basket, hence the term consumer price index
(CPI). The annual inflation rate is derived by determining the change in the CPI index value
of the relevant month of the current year compared with the CPI index value of the same month in the
previous year, expressed as a percentage.
The full basket of goods and services in SA historically included interest rates, fuel prices, and other
volatile or seasonally fluctuating prices. CPI is also referred to as headline inflation or overall inflation.
Core inflation is CPI (or headline inflation) stripped of interest rates, fuel prices, some fresh foods, VAT,
and local government rates. CPI-X (also called underlying inflation) is CPI stripped of mortgage costs.
CPI-X, for many years the government’s benchmark for inflation targeting, was replaced in 2009 by
CPI. Mortgage costs were replaced in the basket by owner’s equivalent rental (OER), the international
standard indicator for housing costs.
The weightings of the various constituents of the CPI basket can be contentious. Statistics SA, the official
government agency, revises the weightings in the index every five years in line with international best
practice to ensure that the CPI reflects the current consumer spending patterns.
The lowest inflation rate in SA during the last 50 years was measured in 1963 (1.0%).
This sector originally had four sub-secotrs: Money Market, Income, Bond and Varied
Specialist funds.
In 2013 funds in the Varied Specialist sector which held shares and listed property were moved to
the Multi Asset tier and renamed Multi Asset Income funds.
That year, the Bond funds were renamed Variable Term funds and the Income funds were renamed
Short Term funds to better reflect their risk and return characteristics.
As of October 2024 funds that invest predominantly in inflation-linked bonds have been classified
in the Variable Term ILB funds subcategory. 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 African–Interest Bearing–Short Term sector is the STeFI Composite index.

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