Over the last ten years South African unit trust investors have shown an overwhelming preference for multi-asset portfolios. Between the end of 2006 and the start of 2017, the amount of money invested in South African multi-asset funds jumped from R111.8 million to R902.5 million.
Flows into these funds has far out-stripped those into any other category over this period. Financial advisors and investors have very clearly seen the benefits of the diversification that these portfolios offer.
At the same time, index tracking has also become an increasingly popular investment choice. Advisors and investors have been attracted to their simplicity and lower cost.
With these two trends coinciding, it is only natural that passive multi-asset funds would become a feature of the South African market. Nedgroup Investments was a pioneer in this field when it launched the first balanced index tracking unit trusts in September 2009.
The Nedgroup Investments Core Diversified Fund and the Nedgroup Investments Core Guarded Fund have both been extremely successful and even after many other competitors have brought out their own offerings, these have remained the market standard-bearers.
Nedgroup Investments has not, however, been satisfied to leave things there. It has continued to innovate and earlier this year added a third South African passive balanced offering to its range – the Nedgroup Investments Core Accelerated Fund, which sits in the multi-asset high-equity category.
The reason for adding this new portfolio is that while the Core Diversified Fund is also a high-equity option, its allocation to growth assets is well below the limits imposed by Regulation 28 of the Pension Funds Act. It has a total equity exposure of 67.5% and a combined equity and listed property exposure of 74.5%.
Jannie Leach, the head of Core Investments at Nedgroup Investments, argues that this might be fine for someone a decade or so from retirement, but is too conservative for a young investor who has a 30 or 40 year time horizon.
“Typically, balanced funds are not aggressive enough for early life stage investors,” says Leach. “Up until about 10 years to retirement you can have 90% to 100% in growth assets.”
Most balanced funds do not use their full offshore allowance of 25% either.
The Nedgroup Investments Core Accelerated Fund therefore does what no other passive offering has attempted, which is to run a portfolio very close to the allowed maximums imposed by Regulation 28. As the table below indicates, its combined equity and listed property exposure sits at 90%.
Source: Nedgroup Investments
This makes it significantly more aggressive than the Core Diversified Fund, and, Leach argues, more suitable for younger investors.
“Particularly because in most cases you will be contributing monthly, so it won’t be a massive lump sum that can experience a draw down,” he says. “Over time, you will get the benefit of rand cost averaging. And when you do get to the point where you have built up a substantial amount of capital you can then progress to lower-risk funds.”
While the fund has maximised its offshore and equity exposure, the weighting given to listed property is still well below the 25% limit. Leach explains that this is due to the nature of the local listed property market.
“The property sector on the JSE is still very concentrated,” he says. “To get to the full 25% you would effectively need 20% in local property, and that would mean that the largest holdings in the portfolio would be listed property companies. From an overall diversification perspective that’s not ideal, as you would be taking massive bets in the real estate space.”
Leach believes that the fund is ideal for investors in retirement annuities or preservation funds. There has also been demand from institutional investors who are looking to build proper life stage solutions within retirement funds.
The Core Accelerated Fund has a target return of inflation plus 6%. This is similar to what an investor could expect in a pure equity fund, but the diversified nature of the portfolio means that it should be able to deliver this return with less risk and lower volatility.