Over the past decade and a half balanced funds have become by far the most popular choice for local investors. At the end of 2004 there was less than R10 billion invested in high equity and absolute return funds. Today, funds in the South African multi-asset high equity category have combined assets under management of nearly R480 billion.
The flow of money into balanced funds has also been heavily concentrated into just a few portfolios. According to figures from Morningstar, the five largest unit trusts in this category account for 58.4% of the total. The 10 largest have a market share of 74.3%. This is in a category that currently has 199 funds.
For many investors and financial advisors, the big funds are the ‘safe names’ in the local asset management industry. They have established investment teams and strong track records.
As the table below shows, every one of the 10 largest funds in this category is among the top 20 performers over the past 10 years, and all of them have outperformed the category average. This is out of 49 funds with track records going back that far.
|Large fund performance|
|Fund||Size||10-year annualised||Category rank||Category quartile|
|Allan Gray Balanced Fund||R152.6 billion||11.64%||19||2|
|Coronation Balanced Plus Fund||R86.9 billion||12.93%||5||1|
|Investec Opportunity Fund||R43.7 billion||12.42%||8||1|
|Foord Balanced Fund||R32.7 billion||11.88%||15||2|
|Discovery Balanced Fund||R25.3 billion||13.45%||1||1|
|Prudential Balanced Fund||R22.4 billion||13.04%||2||1|
|PSG Wealth Moderate FoF||R20.0 billion||11.97%||13||1|
|Old Mutual Balanced Fund||R17.9 billion||12.14%||9||1|
|SIM Balanced Fund||R17.7 billion||12.08%||11||1|
|Investec Managed Fund||R14.8 billion||12.61%||6||1|
The chart below further illustrates how big funds have been far more likely than small funds to outperform over the past 10 years. Nearly 70% of top quartile performers are large funds, and there is not a single big fund in the bottom quartile.
This would appear to make a very strong case for these large, well-known portfolios. However, this is entirely what anyone would expect to see.
As funds outperform, they will naturally attract more assets. Those that underperform will lose assets. So it makes perfect sense for bigger funds to be top-performers and smaller funds to be bottom performers. Anything else would be illogical.
Which comes first?
This therefore raises the question of whether these funds outperform because they are big, or if they are big because they have outperformed?
It’s worth considering that 10 years ago these were not the 10 biggest funds in the category. If one looks at which funds were the biggest 10 years ago and how they have performed since, a slightly different picture emerges:
|Large fund performance|
|Fund||Size at Dec 31, 2008||10-year annualised||Category rank||Category quartile|
|Allan Gray Balanced Fund||R23.3 billion||11.64%||19||2|
|Investec Managed Fund||R3.7 billion||12.61%||6||1|
|Coronation Balanced Plus Fund||R3.2 billion||12.93%||5||1|
|Foord Balanced Fund||R2 billion||11.88%||15||2|
|Nedgroup Investments Managed Fund||R1.9 billion||n/a||n/a||n/a|
|RMB Balanced Fund||R1.9 billion||n/a||n/a||n/a|
|Old Mutual Balanced Fund||R1.3 billion||12.14%||9||1|
|Stanlib Stability Fund||R1.3 billion||11.58%||20||2|
|SIM Balanced Fund||R852 million||12.08%||11||1|
|RE:CM Core Managed Fund||R772 million||n/a||n/a||n/a|
There is a large degree of overlap, with six of these funds staying within the 10 largest. The four largest are all in that group. It is, however, the others that are most interesting.
The Nedgroup Investments Managed Fund does not have a 10-year track record because two years ago it changed its investment strategy. The Association for Savings and Investment South Africa (Asisa) ruled that this change was so significant that it could no longer publish its performance history.
This was a controversial decision because it followed a period of sustained underperformance by the fund that resulted in Nedgroup Investments changing the fund manager from RECM to Truffle. Due to these troubles, the fund has also actually decreased in size over the past decade. It is now just R1.1 billion in size, and a small fund rather than a big one.
The RMB Balanced Fund no longer exists. Its name was changed to the Momentum Balanced Fund in 2011, and it was later amalgamated into the Momentum Enhanced Growth Fund of Funds in 2017. This followed a number of years of underperformance.
The Stanlib Stability Fund has also been through a name change. It is now the Stanlib Balanced Fund. Due to some mixed performance, it hasn’t grown to the same extent as some of the other portfolios on this list, and is now the 17th largest fund in the category.
In the case of the RE:CM Core Managed Fund, the unit trust didn’t only change its name, but also moved into the worldwide multi-asset flexible fund category. It is now called the RECM Global Flexible Fund, and its assets under management have declined sharply to just R560 million.
It’s also worth considering which funds currently in the top 10 by size were not there 10 years ago.
The Discovery Balanced Fund was only launched at the end of 2007, so it was still a new portfolio in 2008. The Prudential Balanced Fund was quite well established already, but it was well outside the top 10 in terms of size. The Investec Opportunity Fund already had assets of R5.5 billion, but it was in a different category 10 years ago. It was being managed as a flexible fund.
What this all shows is that investing in the largest funds is by no means a risk-free strategy. It is also no guarantee of future outperformance.
Consider that over the past five years, the performance of the current large funds has been more mixed. Although five of them are in the top 15 performers, there have been some disappointments:
|Large fund performance|
|Fund||Size||Five-year annualised||Category rank||Category quartile|
|Allan Gray Balanced Fund||R152.6 billion||7.10%||15||1|
|Coronation Balanced Plus Fund||R86.9 billion||5.79%||48||2|
|Investec Opportunity Fund||R43.7 billion||7.22%||9||1|
|Foord Balanced Fund||R32.7 billion||5.13%||67||3|
|Discovery Balanced Fund||R25.3 billion||7.14%||13||1|
|Prudential Balanced Fund||R22.4 billion||7.17%||11||1|
|PSG Wealth Moderate FoF||R20.0 billion||6.93%||17||1|
|Old Mutual Balanced Fund||R17.9 billion||6.66%||24||1|
|SIM Balanced Fund||R17.7 billion||5.96%||41||2|
|Investec Managed Fund||R14.8 billion||8.67%||4||1|
The performance of many smaller funds over this period has also been compelling. As the chart below shows, a much larger percentage of smaller unit trusts have appeared in the top two quartiles. There are also some large funds that have been bottom quartile performers over this period:
It is still apparent that investors in a large fund have a higher chance of outperforming the category average. However, the proliferation of balanced funds and the growing number of really good boutique managers means that they are certainly not the only game in town.