A big issue during my stint in the mutual fund trade press was the crying need for a South Africa-only category for unit trusts. This is particularly true for equity funds. It was confusing for most financial advisers — let alone the layperson — that a “domestic” equity fund could have as much as 45% invested in international shares.
And even in the 55% that had to be invested on the JSE, there was very little restriction on how much was invested in dual-listed shares such as Prosus, Richemont, British American Tobacco and Anheuser Busch-InBev.
Short-term performance doesn’t mean much statistically, but active funds exist for only one reason. Don’t pay much attention to all these Greek letters. They live and die by ability to give their clients more money in their bank balances than they would earn investing in the benchmark.
But it is confusing for investors who believe they are investing in funds that promise to provide a return in excess of the JSE to find almost half of the fund is invested in overseas stock markets.
Sunette Mulder, senior policy adviser at the Association for Savings & Investment South Africa (Asisa), says there was pressure to change the classification after the budget speech in 2022 when the Reserve Bank increased the offshore investment limit to 45%. Before that most Asisa members did not see a change in the classification standard as a priority. Yet it has been more than two years since it became obvious that it made no sense to compare 100% domestic equity portfolios with hybrid domestic/overseas funds.
Asisa isn’t a regulator. It is essentially a spider’s web of committees. It has a large and disparate constituency to satisfy, so changing the standards would have taken a while. The Asisa bureaucracy used the opportunity to undertake a full review of the classification standards. Its key objective is to provide investors with a meaningful comparison of performance and potential risks when investing in a particular mutual fund.
In other countries private providers such as Morningstar set classification standards — and, in fact, Morningstar offers its own classification structure in South Africa. But few people in this country take any notice of anything other than the Asisa classifications. The National Treasury and the Financial Sector Conduct Authority have delegated responsibility for unit trust classifications to Asisa, so though it is an industry body and lobbyist it has a quasi-regulatory official status.
The difference in the return profile of portfolios invested in local and foreign markets ... caused a categorisation that did not allow for meaningful comparison
— Sunette Mulder, Asisa
The classification standard has three steps based on the investable universe of the fund. The first classifies portfolios based on their top-level geographical exposure, domestic, regional and global. The second classifies funds according to their asset classes such as equities, interest-bearing and real estate. Unlike almost all other markets, multi-asset funds dominate in South Africa, accounting for half of industry assets.
In the third step of the process Asisa describes the primary focus within the investment universe, such as Equity General, Multi-Asset High Equity (a rather clunky name for what is usually just called Balanced) and Interest Bearing — Short Term — again a rather clunky name for what used to be called Income Funds.
It has turned out that there is very little demand for regional funds, such as European, UK or US funds. Those portfolios have moved into the Global Portfolio category.
The four asset classes remain as they were — equity, multi-asset, interest-bearing (bonds and cash) and real estate (aka listed property).
In October a new category was introduced, the SA Equity (SA General category) — as opposed to the SA Equity (General category). These funds invest exclusively in shares on the JSE.
As Mulder puts it: “The difference in the return profile of portfolios invested in local and foreign markets, often amplified by currency fluctuations, created an environment where funds grouped together often no longer had a comparable investment universe. This caused a categorisation that did not allow for meaningful comparison.”
No less than 60 portfolios moved from the SA Equity (General category) to the SA Equity (SA General category) when the revised category classification regime came into effect on October 1 2024.
It is probably still best for debit-order investors — in other words the market for which unit trusts were created — to continue to invest into the old school general equity funds, to get some diversity between local and overseas shares in a one-stop shop.
The double SA category is designed principally for retail fund aggregators, generally known these days as discretionary fund managers, as well as by larger financial planning practices that pick funds in-house.
A different trend has been the introduction of new categories for fixed income as the sector moves beyond vanilla cash and bonds.
There has been rather less discussion about the changes to multi-asset portfolios. There is a category called the Multi Asset — SA High Equity category. These funds invest in SA equity, bond, money or property markets and hold 100% of their market value in South Africa. You might expect this to be quite a small niche. Virtually all investors would want to take advantage of offshore diversification — even the Government Employees Pension Fund, with its “developmental” mission, has assets offshore.
But there is a nascent tendency to split funds between a domestic and global balanced manager. Prescient recently launched a domestic balanced fund after finding clear demand for the product.
A different trend has been the introduction of new categories for fixed income as the sector moves beyond vanilla cash and bonds.
In what seems like a technicality, money market funds have been classified as interest bearing. But money funds used to be treated as operating in a different industry, competing with bank products — not with other mutual funds — so that’s been a change in thinking. Financial planners these days use money market funds extensively in the short-term “bucket” of client savings.
Fixed income was historically extremely dull in South Africa — the poor relation of equities, in fact — but as it evolved some new categories have been created such as an Interest Bearing — Variable Term Inflation Linked Bonds category for those portfolios that invest at least 80% of their market value in Inflation Linked Bonds (ILBs).
There is also the rather clunkily named Interest Bearing — Unclassified (Global Portfolios only) category. These portfolios invest in a spectrum of bonds, fixed deposits and other interest-bearing securities. Due to their unique investment objectives, Mulder says, portfolios in this category aren’t ranked by performance.
It has taken three-and-a-half years since it announced its alliance with JP Morgan Asset Management, but Stanlib has finally done the switch everyone expected. In October 2021, Standard Bank’s institutional asset manager has announced a change in the sub-adviser of its Global Balanced and Global Balanced Cautious Funds from mid-sized Columbia to JP Morgan, the mammoth New York-based bulge bracket firm.
Mark Lovett, Stanlib’s head of investments, says a big advantage of the switch is that the funds will be able to access a wider range of building blocks across asset classes and sub-strategies. The JP Morgan team, Lovett believes, has a robust underlying risk management process. Lovett says that in a rapidly evolving market environment, it is crucial for firms to leverage multiple strategies to deliver returns for clients. By implication, Columbia Threadneedle could not provide this — or least to nothing like the same extent. Since UK-based Lovett came on board as de facto Stanlib chief investment officer in 2018, the firm has developed an “ongoing commitment to enhancing the performance of its funds” — it’s unclear what its aim was before that — “and ensuring that they are managed by the best possible teams”.
Like all fund managers, Stanlib aims to make more money for its clients than the competition, but it aims to do this through a “progressive” investment approach.
Sometimes being “progressive” involves a scorched earth policy. For example, Lovett retrenched the fundamental equity team, the successor to Roy McAlpine’s market leading Liberty Asset Management team. Stanlib’s domestic equities are now run on a black box basis by quants whizz kid Rademeyer Vermaak.
Stanlib dipped its toes in the water with JP Morgan when it launched the JP Morgan-run Stanlib Global Select Fund and Stanlib Global Multi Strategy Diversified Growth not long after the partnership was consummated.
Lovett says the global balanced funds will be competitive because of the JP Morgan performance track record and culture, as well as their significant size and scale in global multi-asset capabilities, which is crucial in terms of generating sustainable alpha (outperformance).
Columbia Threadneedle still gets some crumbs as it will continue to manage the Stanlib Global Equity Fund.
Lovett is pleased with the performance and ongoing relationship with Columbia Threadneedle on the fund. Its portfolio manager Neil Robson has a strong following among financial planners and fund aggregators in SA.
As Lovett sees it there is a clear distinction between Robson’s growth-orientated global equity fund and the core global balanced funds which JP Morgan runs.
Stanlib’s predecessor SCMB Asset Management, from 1997 to 2002 had a strategic relationship with Boston-based Fidelity, which at the time was the world’s strongest asset management brand. Yet we hear less and less about Fidelity, which has nowhere near the market share and prestige it enjoyed in the 1980s and 1990s with such cult fund managers as Peter Lynch, Anthony Bolton and our own Allan Gray.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.