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Top-performing flexible funds outperform the best equity funds

For all time periods up to 10 years.
The fact that it remains such an underutilised category is somewhat surprising. Image: Shutterstock

According to the latest statistics from the Association for Savings and Investment SA (Asisa), there is more than six times as much money invested in South Africa general equity funds as there is in South Africa multi-asset flexible funds.

The equity general category has total assets under management of R311 billion. There is just R52 billion invested in local flexible funds.

It is somewhat surprising that this remains such an underutilised category. A Citywire analysis shows that for all time periods up to 10 years, the returns from the top-performing flexible funds eclipse those of the best general equity portfolios.

Generating alpha

This may appear to be a skewed comparison since the flexible category allows for a more diversified asset allocation. Over the medium term, this has certainly played a role. Some of the top-performing flexible funds for the past three and five years have carried high exposure to South African bonds.

However, most of the top-performing flexible funds over the longer term are predominantly equity portfolios with the ability to default into cash. They tend to have minimal exposure to other asset classes.

In addition, the fact that flexible funds are underexposed to equity should, viewed traditionally, be a long-term drag on performance. Equity funds that are permanently fully invested in growth assets and prepared to stomach higher volatility should realise higher returns.

However, having the ability to protect their portfolios in cash and exploit additional sources of return has proved to be beneficial to flexible fund managers over both the short and long term.

They may also gain from being less beholden to an equity index benchmark. Funds in this category tend to have inflation-linked or composite benchmarks, which could allow the managers to be less constrained in their stock picking and portfolio construction.

Ten-year performance

In a combined universe of general equity and flexible funds, the top five performers over the past 10 years (to the end of October 2020) are all flexible funds. Six of the top 10 are from the flexible category.

Fund Category Annualised return
Centaur BCI Flexible A Flexible 12.5%
Bateleur Flexible Prescient A1 Flexible 12.5%
BlueAlpha BCI All Seasons A Flexible 12.2%
Long Beach Flexible Prescient A1 Flexible 12.2%
36One BCI Flexible Opportunity A1 Flexible 11.9%
SIM Top Choice Equity B1 Equity 11.1%
Autus Prime Opportunity A Flexible 11.0%
Aylett Equity Prescient B3 Equity 10.0%
Ninety One Equity R Equity 9.9%
Stanlib Equity R Equity 9.6%

Source: Morningstar

The Centaur Flexible fund has more than 75% of its portfolio in local and offshore equity. Less than 12% is held in local bonds, and the remainder is in cash.

The Bateleur Flexible fund carries a little more than 80% exposure to domestic and foreign equity and 7% in South African bonds. It also has a 5% position in commodity exchange-traded funds (ETFs), with 7% in cash.

The BlueAlpha All Seasons fund holds only equity and cash. Overall, 73% of the portfolio is in local and offshore equity and 27% in cash.

Five-year performance

Over the past five years, once again, the top-performing funds are in the flexible category. Half of the top 10 are, however, general equity portfolios.

Fund Category Annualised return
Long Beach Flexible Prescient A1 Flexible 10.3%
Gryphon Flexible B Flexible 10.0%
Fairtree Equity Prescient B3 Equity 9.7%
Ninety One Value R Equity 7.3%
Noble PP Stanlib Flexible A Flexible 7.2%
BlueAlpha BCI All Seasons A Flexible 5.9%
BCI Enhanced Equity B Equity 5.7%
Element Islamic Equity SCI A Equity 5.7%
Kagiso Islamic Equity A Equity 5.5%
Truffle SCI Flexible Income A Flexible 5.5%

Source: Morningstar

While the top-performing flexible funds over the long term are predominantly equity portfolios, this changes over a shorter time period.

The Gryphon Flexible fund follows a pure asset allocation mandate and uses only index products to access different markets. Currently, it has no equity exposure at all and has not had any since 2018. It is 68% invested in South African bonds, with the remainder in cash.

The Noble PP Stanlib Flexible fund is also mainly exposed to South African fixed interest instruments. Just 8% of its portfolio is held in local equity.

The Truffle SCI Flexible Income fund is an income portfolio and has mostly been invested in local credit. It currently holds 37% of its assets in local dividend-paying equities.

Three-year performance

On a three-year view, six of the top 10 performers are flexible funds.

Fund Category Annualised return
Gryphon Flexible B Flexible 9.8%
Fairtree Equity Prescient B3 Equity 8.1%
Noble PP Stanlib Flexible A Flexible 6.9%
Rezco Equity Z Equity 6.7%
Long Beach Flexible Prescient A1 Flexible 6.5%
Prescient Optimised Income B1 Flexible 5.7%
BlueAlpha BCI All Seasons A Flexible 5.6%
Momentum Real Return A Flexible 5.2%
36ONE BCI Equity A Equity 5.0%
BCI Enhanced Equity B Equity 4.2%

Source: Morningstar

Again, the top-performing flexible funds over this period are more fixed income-focused. The Long Beach and Blue Alpha funds are, however, obvious exceptions. Neither has any exposure to bonds, and the Long Beach portfolio is fully invested in the stock market.

YTD performance

Seven of the top 10 are flexible funds over the shortest time period. There is a fairly even split between those that are more asset allocation-focused and those that are mainly equity portfolios.

Fund Category YTD return
Gryphon Flexible B Flexible 18.1%
Long Beach Flexible Prescient A1 Flexible 15.3%
BlueAlpha BCI All Seasons A Flexible 14.9%
Bateleur Flexible Prescient A1 Flexible 10.7%
36ONE BCI Equity A Equity 10.0%
BCI Enhanced Equity B Equity 9.7%
Methodical BCI Equity B1 Equity 7.4%
Glacier AI Flexible FoF B Flexible 6.9%
36ONE BCI Flexible Opportunity A1 Flexible 6.9%
Autus Prime Opportunity A Flexible 6.6%

Source: Morningstar

Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.

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Ninety One managed fund pretty much behaves like a flexible fund.

I have a question please. As South African private investor, who must I contact if I want to invest into one of these funds, eg Gryphon Flexible?

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