Laura du Preez | 07 November 2024
Laura du Preez has been writing about personal finance topics for more than 20 years, including eight years as personal finance editor for two leading media houses.
An amendment to the classification of unit trusts and exchange traded funds made last month should make it easier for investors to identify and compare performance of funds that invest only in South African markets.
Some unit trust data providers have already implemented the new classification and others will reflect the changes in their fund listings from this month.
One of the two most significant changes is the introduction of a sub-category of general equity funds that invests only in shares listed on the JSE and the other smaller South African exchanges.
Data from Profile Data’s Fundsdata site shows the South African Equity General SA category already has more than 50 funds, including some from well-known South African managers. The list includes the 36ONE BCI Equity Fund, the Allan Gray SA Equity Fund, the Coronation SA Equity Fund, the Fairtree Equity Fund, the Foord Equity Fund, the M&G SA Equity Fund, the Ninety One SA Equity Fund, the Old Mutual Investors Fund, the Rezco Equity Fund and the Truffle SCI Equity Fund.
The new category also includes a number of index-tracking funds, such as the 1INVEST Index Fund and the Old Mutual Capped Swix Index Fund.
The other significant change is the introduction of a category of multi-asset funds with a high exposure to equities that invests only in South African shares, bonds, listed property, money markets and other local securities or funds.
So far Profile Data is reflecting only five funds in this new sub-category.
The classification of local collective investment schemes was introduced and is managed by a standard drawn up by the industry organisation representing fund managers and collective investment schemes, the Association for Savings and Investment South Africa (ASISA).
Sunette Mulder, senior policy advisor at ASISA, says the review of the fund classification standard was necessitated by the South African Reserve Bank’s 2022 increase in offshore investment limits for local funds that has since then enabled them to invest up to 45 percent of the fund in offshore markets.
The increased limit was a significant change since previously South African funds could invest up to 30 percent of the fund offshore. Before 2022 a further 10 percent of South African funds could be invested in other parts of Africa, but due to liquidity and other problems many funds did not make good use of this allocation.
Joao Frasco, chief investment officer at INN8 Invest, says the change in the ASISA fund classification standard is long overdue as the aim of the standard is to create sub-categories of funds which are fairly homogenous and comparable.
A fund with 45 percent offshore exposure (or even 30 percent) is going to be very different to funds with no offshore exposure, he says.
Mulder says the difference in the returns achieved by funds invested in local and foreign markets is often amplified by changes in the value of the rand relative to other major currencies. This resulted in funds choosing to invest in South Africa only having investment universes that were no longer comparable to that of other funds.
Profile Data’s performance figures show, for example, that the Allan Gray Equity Fund which can invest in offshore markets and has been able to make use of the increased offshore allowance since it was introduced in February 2022, has had an annualised return for the period to the end of September of 11.52 percent a year.
The Allan Gray Equity SA fund which invests 100 percent in South African shares, however, has a return of 10.48 percent a year over the same period.
The difference in the annual average returns reflects the different investment universes of the two funds over a period when local market returns were more muted than offshore ones, particularly in 2023, Shaun Duddy, Allan Gray’s head of product development, says.
The annualised return from the JSE as measured by the JSE All Share Index (ALSI) over the period was 10.03 percent relative to a 16.94 percent annualised return from global markets as measured by the MSCI All Countries World Index (ACWI) for the period, Profile Data’s performance statistics show, Duddy says.
However, the JSE All Share index (ALSI) is showing a higher return than that of the MSCI All Countries World Index (ACWI) (in rands) for the current year to the end of September 2024 – 15.91 percent for the local index and 11.46 percent for the global market index (in rands) for the year to 30 September 2024.
South African investors are frequently advised to invest into offshore markets in order to benefit from greater diversification as the local market represents a tiny proportion of the global economy and does not have shares from all the sectors.
If you are using a single fund to get exposure to the market, a multi-asset fund with exposure to local and offshore asset classes can provide a good solution.
However, Siobhan Simpson, head of unit trusts at Ninety One, says with financial advisers increasingly using discretionary fund managers and other fund aggregators, such as multi-managers, and the focus on fees, there has been a shift towards the use of funds specializing in specific markets as building blocks in diversified portfolios.
The increase in the offshore allowance saw a number of funds focused on investing locally shifting their emphasis to their offshore allocations. Some DFMs and multi-managers prefer to allocate the offshore portion of the fund separately, using standalone (sometimes offshore-domiciled) managers, Simpson says.
This trend has also resulted in a significant increase in these managers coming to South Africa and launching feeder funds, she says.
Frasco agrees that the South Africa only funds will be used predominantly by those investors that prefer to get their offshore exposure from offshore managers, and these investors are predominantly institutional investors and DFMs. It could also be for the investors that simply want to separate the mandates for local and offshore, even though they select local managers for both, in the belief that some managers may be great locally but lack the skills to go offshore, but other local managers may have these skills within their investment teams.
Worldwide funds are free to invest across local and global markets as they see opportunities, and can even invest 100 percent in either market. Frasco says the asset allocation of these funds is still quite different to that of South African funds that can invest up to 45 percent in offshore markets. In the multi-asset flexible sub-categories, for example, South African funds tend to have higher exposures to local markets than worldwide multi-asset flexible funds.
The fund classification standard provides for funds to be classified on the basis of three tiers of the investment universe. The first tier classifies portfolios based on their top-level geographical exposure, Mulder says. This may be either South African, global (mostly offshore markets) or worldwide (South African and offshore markets).
The second tier classifies funds according to their underlying asset classes (equities, multi-asset, interest-bearing, and real estate).
The third tier classifies funds in line with their primary focus within the investment universe, for example, the general equity market, multi-asset class but with a high exposure to equities or in the case of interest-bearing funds, the term of the instruments held.
The top tier has, until last month, included a regional category for funds that confine themselves to investing in a particular region.
Mulder says the regional category has now been removed since very few portfolios used this classification. These portfolios have moved into the global category.
In the third tier, a new sub-category, Equity – Africa category has been created for global funds with a focus on investing in Africa.
In the South African Interest-Bearing category, the money market category has been renamed – SA Money Market, to reflect that these funds invest in local money market instruments.
In the interest-bearing category a new sub-category has been created for funds that invest 80 percent in inflation-linked bonds as the investment universe of these funds is distinct from that of other bond funds.
In the global interest-bearing category a new sub-category for unclassified funds has been introduced as there are a number of funds with unique investment objectives which should not be compared, Mulder says.
