South Africa’s top multi-manager unit trusts

How do funds of funds stack up?

CAPE TOWN – Multi-manager funds, or funds of funds, are not a very widely explored area of the South African unit trust industry. The criticism that their extra layer of fees means that they are too expensive often shuts down any further investigation into their value.

Which means that the benefits of these products are often overlooked. But as a single entry point to a range of top fund managers they can be a very useful tool.

The arguments for and against using these funds will be explored more extensively in future articles, as we dig deeper into how they work. We will also explore the different approaches to multi-management and what investors should look for in such funds.

However, as a starting point it’s worth appreciating how much of the unit trust market these funds of funds make up. More than half of all the funds registered in South Africa’s multi-asset categories use a multi-manager approach.

As the below table indicates, there is a particularly large concentration of such funds in the medium and low equity segments:
 

Ratio of multi-manager funds to total number of funds

Category

Total funds

MM funds

Ratio

Multi-asset Flexible

103

40

38.83%

Multi-asset High Equity

119

58

48.74%

Multi-asset Medium Equity

62

40

64.52%

Multi-asset Low Equity

116

71

61.21%

TOTAL

400

209

52.25%

Source: ASISA

The multi-manager approach is far more prevalent amongst multi-asset funds than in any parts of the industry, however. For instance, of the 161 general equity funds registered in South Africa, only 16 are multi-manager funds. That is just shy of 10%.

This proliferation of funds in the multi-asset band also doesn’t translate directly into a similar share of assets under management. The below table details the assets under management for funds of funds compared to the total in each category: 
 

Ratio of assets under management for multi-manager funds against all funds

Category

Total AUM

MM AUM

Ratio

Multi-asset Flexible

R44.24 billion

R16.24bn

36.70%

Multi-asset High Equity

R279.62 billion

R42.90bn

15.34%

Multi-asset Medium Equity

R35.53 billion

R28.97bn

81.54%

Multi-asset Low Equity

R161.56 billion

R37.72bn

23.35%

TOTAL

R627.25 billion

R 125.83

20.06%

Source: ASISA (as at 31 December 2013)

The low overall figure is primarily influenced by fairly low shares of assets under management in the two major categories in this sector – multi-asset high equity and multi-asset low equity. Within these segments there are a number of “mega funds” that dominate in terms of size.

In the low equity category, for instance, the five largest funds alone control R129.18 of assets under management, or 79.96%. None of these are multi-manager funds.

This does perhaps indicate that the appetite for managing funds of funds is not matched by the desire from investors to put money into them. The most cynical would say that this is because the multi-manager approach favours the industry more than its clients because it creates more opportunity to charge fees. 

However, this isn’t always the case and when you investigates the value that these funds can add, you can see that there are a number that offer excellent returns. The below tables list the best-performing multi-manager funds in five different categories, comparing them against their industry averages. 

General Equity 

South Africa’s top performing multi-manager funds to 31 March 2014

Fund

5 yr

3yr

1 yr

TER

Stewart Macro Equity FoF

22.11%

19.89%

22.42%

2.49%

Stanlib MM All Stars Equity FoF

21.46%

18.56%

24.25%

2.00%

PSG MM Equity FoF

20.78%

17.76%

25.41%

2.35%

Momentum Best Blend Multifocus FoF

20.53%

16.24%

22.88%

1.89%

FG IP Mercury Equity FoF

20.45%

16.85%

16.45%

1.36%

Sector average

19.89%

15.32%

20.63%

 

FTSE/JSE All Share Index

21.70%

17.68%

24.44%

 

Source: Morningstar

While all five of these funds beat the sector average over five years, only one out-performed the All Share Index. Compared to other funds in this category, the Stewart Macro Equity FoF is the 19th best South African general equity fund over five years. 

It is obviously more difficult to produce out-performance using the multi-manager approach in a single asset class. When you are primarily making use of funds in the same category, it’s very difficult be the best fund. 

There are however other reasons for using a funds of funds approach when looking at a single asset class, and those will be explored in a further article. But it does appear that funds of funds fare relatively better in multi-asset categories.

Multi-asset Flexible

South Africa’s top performing multi-manager funds to 31 March 2014

Fund

5 yr

3yr

1 yr

TER

Stringfellow MET Flexible FoF

21.28%

21.18%

22.74%

2.40%

Montrose MET Flexible FoF

20.55%

18.73%

16.43%

3.73%

Amity MET Flexible Growth FoF

19.30%

17.76%

23.00%

2.51%

SIM Managed Aggressive FoF

18.73%

17.29%

21.70%

1.35%

Noble PP All Weather FoF

18.38%

16.75%

17.49%

2.28%

Sector average

15.36%

14.03%

15.10%

 

FTSE/JSE All Share Index

21.70%

17.68%

24.44%

 

Source: Morningstar 

While, strictly speaking, the multi-asset flexible category allows fund managers to invest in any asset class in any ratio, it is dominated by funds that are equity-heavy. Hence the returns here tend to be the highest amongst multi-asset funds. 

What is interesting is that the out-performance of these funds of funds relative to the sector average is higher than amongst the general equity funds. And this trend continues in all the multi-asset categories as an illustration of how the multi-manager approach comes into its own when asset allocation is also a consideration.

It’s also worth noting that the top two funds listed above are amongst the top ten performing funds overall in their category.

The TER of the SIM Managed Aggressive FoF is noteworthy at a reasonably low 1.35%. This shows that not all multi-manager funds are high cost.

Multi-asset High Equity

South Africa’s top performing multi-manager funds to 31 March 2014

Fund

5 yr

3yr

1 yr

TER

AS Forum MET Aggressive FoF

18.77%

18.07%

19.21%

3.63%

MET Odyssey Balanced FoF

18.33%

18.42%

20.86%

2.24%

Southern Charter MET Growth FoF

18.23%

17.35%

17.56%

2.46%

Investment Solutions MM Balanced FoF

17.92%

16.57%

17.97%

1.83%

Momentum Best Bled Balanced FoF

17.46%

17.71%

20.02%

2.37%

Sector average

14.26%

13.66%

15.47%

 

FTSE/JSE All Share Index

21.70%

17.68%

24.44%

 

Source: Morningstar

Again, these top funds show strong out-performance relative to the sector average. The AS Forum MET Aggressive FoF is the second best overall in this category over the five year period, and four of these funds appear in the top 10.

While the AS Forum MET Aggressive FoF appears quite pricey at a TER of 3.63%, the Investment Solutions Multi-Manager Balanced FoF comes in at a much more reasonable TER of 1.83%. This does illustrate the potentially wide discrepancy in costs between these products.

Multi-asset Medium Equity

South Africa’s top performing multi-manager funds to 31 March 2014

Fund

5 yr

3yr

1 yr

TER

AS Forum MET Moderate FoF

17.12%

16.96%

17.45%

3.28%

Montrose MET Moderate FoF

17.02%

16.94%

18.91%

2.35%

SBRO MET Balanced FoF

16.51%

16.30%

15.69%

3.75%

27Four Balanced Prescient FoF

16.43%

17.39%

16.31%

0.87%

Southern Charter MET Balanced FoF

16.30%

15.94%

15.38%

2.72%

Sector average

13.53%

12.67%

13.41%

 

FTSE/JSE All Share Index

21.70%

17.68%

24.44%

 

Source: Morningstar 

This is the category in which multi-manager funds perform the best, as eight of the top ten funds overall over the last five years are funds of funds. The AS Forum MET Moderate FoF and the Montrose MET Moderate FoF are are the two best funds in the whole sector.

Another that stands out is the 27Four Balanced Prescient Fof, which shows a TER of just 0.87%. It not only shows that investors can find low cost multi-management, but also serves as something of an example to other funds.

Multi-asset Low Equity

South Africa’s top performing multi-manager funds to 31 March 2014

Fund

5 yr

3yr

1 yr

TER

Stringfellow MET Stable FoF

14.77%

15.08%

13.41%

2.14%

Oasis Balanced Stable FoF

13.89%

14.00%

12.39%

1.79%

MET Odyssey Conservative FoF

13.43%

13.82%

13.19%

2.14%

Montrose MET Cautious FoF

12.97%

12.98%

12.78%

2.18%

Stanlib Moderate Conservative FoF

12.91%

11.22%

7.86%

1.04%

Sector average

10.61%

10.74%

9.77%

 

FTSE/JSE All Share Index

21.70%

17.68%

24.44%

 

Source: Morningstar 

The multi-asset low equity category is another in which the top fund over five years is a fund of funds. The Stringfellow MET Stable FoF is the best fund in this category over that time period, and in total six multi-manager funds appear in the top ten. 

In the next few articles we will explore how different managers approach a fund of funds mandate, what investors should look for, and where the benefits and shortcoming of this philosophy lie. 

For more, visit Moneyweb’s Click-a-unit trust/ETF tool.

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