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How have balanced passive funds been performing?

There’s been a notable variance year-to-date.

In recent years South African unit trust investors have shown a clear preference for multi-asset, or balanced funds. According to the latest statistics from the Association for Savings and Investment South Africa (Asisa), just under half of all the assets in South African collective investment schemes are now in these kinds of vehicles.

This has also encouraged many asset managers to launch new funds in this space. Over the last ten years, the number of South African multi-asset funds has more than doubled from 320 to 756.

The vast majority of these are actively-managed unit trusts, but in recent years a number of managers have brought out balanced funds that make use of index tracking for all, or at least the majority, of their asset class exposure.

The primary appeal of these products is their cost. They are able to charge annual management fees of as low as 0.34%.

However, they have also demonstrated that through good asset allocation they are able to offer compelling performance. This was most notably demonstrated when the Nedgroup Investments Core Diversified Fund won the Raging Bull award in 2015 for the the top performance by a multi-asset high-equity fund over the previous five years.

This was a highly unexpected outcome, even for Nedgroup Investments themselves, as passive funds are not designed to deliver outperformance, but rather to reflect the market. It showed, however, that if passive balanced funds get their asset allocation correct, outperformance can result.

Investor choice

It has therefore been interesting that passive balanced funds in South Africa have differentiated themselves from each other in two ways. Firstly, the all have their own strategic, or base, asset allocation, which they believe is optimal.

Secondly, some funds keep that asset allocation entirely static while others might make adjustments from time to time. There are even a few that supplement their passive exposure with some active stock picking.

The result is that the performance between these funds can differ quite widely. Just looking at the returns of a selection of these funds for the year to date, two appear in the top 10 amongst South African multi-asset high-equity funds, but others appear much further down the list.

Performance of SA multi-asset high-equity funds

Fund

TIC*

YTD return to 30 November

Prescient Balanced Fund A1

0.52%

18.65%

Satrix Balanced Index Fund A1

0.99%

16.87%

Sygnia Skeleton Balanced 70 Fund A

0.68%

14.73%

IP Active Beta Fund A

1.12%

14.33%

Alexander Forbes Investments Aggressive Passive Fund A1

0.48%

14.14%

BCI BetaPlus Balanced Fund A

1.16%

14.14%

Nedgroup Investments Core Diversified Fund B

0.60%

13.68%

10X Prime High Equity Fund A

0.76%

13.41%

Old Mutual Core Diversified Fund A

0.92%

13.12%

Gryphon Prudential FoF A

0.78%

12.31%

Source: Morningstar (before month-end sign-off)

*TIC = Total investment charges

The Prescient Balanced Fund is the third best-performing fund in the category over this period. It is also more than 6% ahead of the Gryphon Prudential Fund of Funds.

Although this short-term performance should not be taken as an indication of which funds are better than others, it does show the range of performance that can be experienced in different passive balanced funds. Investors are therefore not just ‘buying the market’ as they might be with a single asset class index tracker. They are buying a particular view of the market and this means that they need to make more informed choices.

It’s important to understand which underlying indices the funds are using, what their asset allocation is, whether there is also an active component to the portfolio, and whether the asset allocation is fixed or if it changes over time. Only then can investors be comfortable with a strategy and also appreciate why it performs or doesn’t perform at certain times.

Strong three-year performance

Taking a longer-term view gives some idea of how these funds have performed relative to their peers. The table below shows their three-year performance to the end of November.

Performance of SA multi-asset high-equity funds

Fund

TIC*

3 year annualised return to 30 November

Prescient Balanced Fund A1

0.52%

9.72%

Satrix Balanced Index Fund A1

0.99%

8.02%

Sygnia Skeleton Balanced 70 Fund A

0.68%

8.59%

IP Active Beta Fund A

1.12%

6.41%

Alexander Forbes Investments Aggressive Passive Fund A1

0.48%

BCI BetaPlus Balanced Fund A

1.16%

Nedgroup Investments Core Diversified Fund B

0.60%

8.35%

10X Prime High Equity Fund A

0.76%

Old Mutual Core Diversified Fund A

0.92%

Gryphon Prudential FoF A

0.78%

8.25%

Source: Morningstar (before month-end sign-off)

(Not all funds have three-year track records.)

The Prescient Balanced Fund is again one of the top 10 performers in the South Africa multi-asset high-equity category over this period. The Satrix, Sygnia, Nedgroup Investments and Gryphon funds are all within the top quartile.

While this is still a fairly short period over which to be judging these funds, most of them do not have longer performance histories and so this is the best available data. They do, nevertheless, stand up well over this period.

Compare the performances above to those of the largest funds in this category, shown below:

Performance of SA multi-asset high-equity funds

Fund

TIC*

3 year annualised return to 30 November

Allan Gray Balanced Fund A

1.67%

10.52%

Discovery Balanced Fund

2.11%

9.23%

Investec Opportunity Fund R

1.75%

8.45%

Coronation Balanced Plus Fund A

1.76%

7.88%

Foord Balanced Fund R

1.63%

7.09%

Source: Morningstar (before month-end sign-off)

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COMMENTS   9

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Would be nice to know from the legendary Steven Nathan of 10X why his funds have been performing so poorly?

Its not doing to badly in my opinion. The fact that there is a big performance difference between these passive balanced funds, having a fixed asset allocation is probably not a bad strategy?

Are the fund performances listed in the tables (both active and passive) reflecting an after fee or before fee performance?

Article not clear.

Unit trust returns are always quoted after of costs.

Index funds continuing to do well – the question is: will the SA investment public follow the US example? This has resulted in index funds grabbing around 40% of the market from their active competition…

If you’re interested in an index fund, why not check out http://www.thinkdirect.co.za 🙂

I have a relatively small amount in a preservation fund with PSG that was recommended by my PSG “advisor”

Zero growth in 2 years.

Oh no. What a rude fund! It knew your money has been invested and still chose not to perform. I’m the same, as soon as I invest in a fund I want to go off on a performance run like never before. On a serious note, with such unrealistic performance expectations I have little confidence that you will achieve your investment objectives.

That’s why you need an independant advisor!

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