Multi-asset funds: unit trusts that ride the storm

The rapid turnaround in South African investors’ good fortunes highlights the need to have a longer-term investment plan rather than just reacting to short-term market movements.

stock investmentWith the rand plummeting, the JSE down over 4% this month and government bonds shedding 9% of their value, the only place to make money it seems is offshore in developed markets.

While most fund managers have been urging South Africans for the last 18 months to invest offshore, no-one could have predicted the exact timing that South Africa’s markets would tumble. Markets are by nature notoriously volatile and trying to second-guess short-term movements often increases one’s risk.

Research shows over and over again that investors tend to significantly underperform the fund they are invested in because of their attempts to time the market. During a market correction, investors panic and withdraw their funds right at the bottom, missing nearly all of the recovery. Only once the recovery is established do they re-invest into a market which is now close to its peak. A diversified fund with lower volatility (price movements) can help to rein in the irrational response to sell after a market crash and thereby improve the investor’s final returns.

Pieter Koekemoer, head of personal investments at Coronation, says that rather than trying to second-guess the short-term rand movements, which are notoriously difficult to predict, the best way for the average household to deal with volatility remains to invest in a multi-asset fund with a risk budget appropriate to the investor’s need. “Just make sure it has the ability to include foreign assets,” says Koekemoer.

Richard Carter, director of Allan Gray Life says not even the best fund manager in the world can accurately predict exactly what the market will do. “This is why it is so important to ensure you have a diversified portfolio. You can reduce your risk exposure to particular sectors simply by investing in other stocks which can offset a fall in, for example, resources. Our balanced fund, for example, is invested across equities, hedge equities, fixed interest and gold. Of that, a certain percentage across these is invested offshore,” he says. This ensures that regardless of the rand’s movement, your investment is partly protected through foreign exposure.

Coronation, which has held full offshore allocations across its multi-asset funds, believes that the long-term trend for the rand is to remain weak and that there are better investment opportunities offshore. “Even at the current rand value we believe the long-term offshore opportunity is more attractive than the JSE,” says Koekemoer. Over the last two years many share prices in developed markets have looked far more attractive than South African equities.

The top multi-asset funds

A multi-asset fund allows the fund manager to allocate money between different asset classes including South African equities, cash, bonds, property and offshore assets if its mandate allows. The fund manager then makes the decision as to which asset classes to invest in, removing that decision for the investor.Multi-asset funds have increased in popularity as financial advisers focus on selecting the correct risk profile for clients and leaving the asset allocation decision to the fund manager. Multi-asset funds now account for the majority of inflows into unit trusts. According to the Association of Investment and Savings South Africa (ASISA), at the end of March 2013 this category held 44% of industry assets and attracted R26.2 billion in net inflows in the first quarter of this year.

The amount of equities that a fund can hold will depend on the mandate of the fund. While lower exposure to equities will reduce the short-term price movements of the fund, it also reduces the potential long-term returns:

A low-equity multi-asset fund can only hold up to 40% in equities and tends to be more conservative. These funds often target a specific return relative to inflation.  According to research house Morningstar, over the last five years ending 31 May 2013 the top performing fund in this sector was Coronation Balanced Defensive which returned 12.97% per annum followed by Nedgroup Investment Stable Fund.

A medium-equity fund can hold up to 60% in equities. These funds generally comply with the prudential investment guidelines allowing them to be used for retirement fund investments and are usually referred to as balanced funds. According to the Morningstar figures the top performing fund in this sector was Coronation Capital Plus which delivered an annual return of 12.85% followed by Montrose MET Moderate Fund of Funds which delivered 11.18% per annum.

A high-equity fund can hold up to 75% in equities if the fund manager is bullish on the market. Once again Coronation tops the tables over five years with its Balanced Plus Fund delivering 13.2%; it is also the top performing fund over ten years. This is followed by the Dotport MET Prudential Fund of Funds, however this fund has not done well over any other time periods. Allan Gray Balanced Fund has been a consistent performer in this sector ranking fourth over ten years and has recently benefited from its offshore exposure.

A flexible fund has no maximum or minimum limits on how much equity it can hold and this is left entirely to the discretion of the fund manager. The top performing flexible fund is Centaur MET Flexible, delivering 18.41% over five years, followed by Stanlib Flexible Property Fund – although this fund has a specific bias to property and has done poorly over the short term due to the fall in the value of listed property. Rezco Value Trend has been the most consistent performer in this sector, delivering 14.11% over five years and over 16% in the first five months of this year.

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