Page 145 - Profile's Unit Trusts & Collective Investments - March 2026

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%).
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.
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 potential for capital
growth and some risk of capital loss. A common benchmark for the sector is the JSE/ASSA All Bond
index (Albi).
Money Market funds
These funds seek to maximise interest income while protecting income. They also provide
immediate liquidity. Funds in this sector invest in money market instruments with a maturity of less
than 13 months. The average duration of the underlying assets may not exceed 90 days and a
weighted average legal maturity of 120 days.
These funds are typically viewed as short term, highly liquid investments. The funds are often
used by investors as a temporary investment or as an attractive alternative to a bank fixed deposit

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