Portfolio watch: SA’s top worldwide flexible funds

The worldwide multi-asset flexible category is the least restrictive of all local unit trust categories. Managers of these funds can invest in listed equities, bonds and property as well as cash instruments in any market anywhere in the world.

The benefit of this is that these funds are able to position themselves entirely based on the manager’s best view. The lack of restrictions means that fund managers can follow their convictions about which asset classes and which markets are likely to offer the best risk-adjusted returns, whether they be in South Africa or offshore.

On the other side of that coin, however, is that investors are giving their fund managers a lot of freedom. And given the scale of opportunity that exists in global markets, they have to trust that their fund manager is good enough to sift through all of the potential investments that could be made to select the appropriate ones.

In general these portfolios are managed aggressively and weighted towards equities, but their performances can vary significantly. Over the last five years, the difference in the annualised returns between the best and worst of them is just over 12% a year. Compounded, that is a huge variance.

For investors, there are therefore a few very important considerations when looking at funds in this category. Since fund managers have such discretion, their approaches are going to differ widely. You must understand what the manager’s mandate is, how they approach it and what they are trying to achieve.

You should also be very cognisant of the benchmark they are using. Most use inflation-plus benchmarks, which essentially makes them absolute return funds more than global equity offerings. It is therefore important to be aware of whether they manage their funds accordingly.

The below table shows the top-performers in this category over the last three years:

Source: Morningstar

This is a small category, with just 19 funds that have track records going back three years, but even over this time frame one sees quite a large variance in performance. There is a more than 10% difference in the annualised returns of the best and tenth-best funds.

It is noteworthy that all of these funds out-performed the local stock market index and showed returns comfortably ahead of a CPI+5% target, but only one of them fared better than MSCI’s global benchmark. To some extent this highlights the importance of investors understanding the mandate of these funds and how they position themselves.

The strong returns generated by the Imalivest Fund are mainly due to its high exposure to offshore equity. At the end of July, it had 85.82% of its portfolio in foreign stock markets, in addition to 4.43% on the JSE. This gave it a total equity exposure of over 90%.

The Flagship Fund of Funds is even more exposed to international equity, with a particular focus on the US market. Its latest fact sheet indicates that 99% of its assets were in offshore equity funds, with 69% in the US. It makes extensive use of index tracking products to get targeted exposure to particular sectors and country indices.

Given the current market conditions, however, it may well be argued that you would like a little more protection in a flexible fund. The Foord Flexible Fund of Funds, for instance, currently has more than a quarter of its portfolio in cash, and the Nedgroup Investments Bravata fund is even more defensively positioned with over 40% of its assets in cash and money market instruments.

In both cases, this has certainly limited their ability to benefit on the up-side, but in a market pull-back it will certainly protect investors on the downside.

Another factor that makes these funds attractive is that, perhaps contrary to what one might expect, they are generally quite reasonably priced. The total expense ratio (TER) on the Imalivest Fund is just 1.13%, and most of these funds show TERs of under 2%. Quantum is the biggest exception at a TER of 3.53%.

Taking a slightly longer term view, the below table shows the top performers over the last five years.

Source: Morningstar

Nine of the funds on this list are also in the top ten over three years. The only addition is the Coronation Market Plus Fund. It replaces the Platinum fund that does not yet have a five year track record.

Again, none of these funds managed to perform better than the MSCI World Index. The majority did however show better returns than the local All Share and all of them comfortably out-performed CPI+5%.

Note: There are only five funds in this category with performance records that date back ten years. This is not a big enough sample to analyse returns over that period.