Registered users can save articles to their personal articles list. Login here or sign up here

SA’s top performing multi-asset income funds

Outperforming the money market.

Money market accounts at South Africa’s major banks are currently paying interest at around 6.5%. That’s only 2% above the current rate of inflation.

This might be a fine place to park money for a very short period, but once you take into account the tax you pay on the interest earned, your savings are probably only barely maintaining their value in real terms. Inflation only has to rise slightly for the buying power of your money to start going down.

Five-year fixed deposits are currently earning around 8.1%. That’s not bad in the current environment, but your capital is completely tied up for that period. You have no liquidity if you need it.

Investors looking for alternatives to these products offered by banks can consider multi-asset income unit trusts. Not only have many of these funds shown the ability to deliver returns consistently higher than bank deposits over a number of years, they also offer access to your money within a matter of days.

As the table below shows, the top funds in this category over the last year have all delivered growth of more than 9%.

SA multi-asset income fund performance to June 30, 2018
Fund 1 year annualised return
Sasfin BCI Flexible Income Fund A 11.41%
Tower Capital Core Income Prescient Fund A1 10.91%
Fairtree Flexible Income Plus Fund A1 10.55%
BCI Income Plus Fund A 10.52%
Pan African IP Income Hunter Fund 9.88%
MI-PLAN IP Enhanced Income Fund A1 9.36%
Sharenet BCI Income Plus Fund A 9.29%
Momentum Income Plus Fund A 9.26%
Investec Diversified Income Fund A 9.25%
Momentum SA Flexible Fixed Interest Fund A 9.15%
STeFI Composite 7.33%
CPI 4.38%

Source: Morningstar

The benefit of multi-asset income funds is that, depending on their mandate, they can invest not only in fixed deposits and the money market, but also bonds, preference shares, listed property (up to 25%), and even dividend-paying stocks (up to 10%). They can also diversify offshore. They therefore have more options when it comes to generating returns.

This does mean that they carry slightly more risk, but the majority of them have a strong focus on preserving capital. Over the last 48 months, for instance, the Fairtree Flexible Income Plus Prescient Fund has only shown a negative monthly return on three occasions. The largest of those declines was -0.38%.

Investors looking at funds in this category should however be aware that funds can go about things very differently. For example, the Sasfin BCI Flexible Income Fund has the STeFI Composite (money market index) as its benchmark. The Fairtree Flexible Income Plus Prescient Fund however targets STeFI + 3%, and the BCI Income Plus Fund targets STeFI + 2%.

What they invest in also differs. The Sasfin fund will not include shares in its portfolio, but Fairtree and BCI might. Sasfin does not have any foreign exposure, but the Fairtree and BCI funds do.

This may appear confusing, but the important thing for investors is to ensure that they are comfortable with the approach of the fund they are investing in. In this category especially, performance numbers alone tell only a very little part of the story.

The Sasfin fund, for instance, may appear to have the most conservative mandate of the three discussed above, yet a look at its portfolio shows that it has a very high exposure to Eskom and Sanral bonds. This may be okay for some investors, and its recent returns have so far justified this approach, but others may feel that there is too much risk there for their liking.

The Fairtree offering, on the other hand, has only 60% of its fund in local bonds. It is diversified offshore and has a higher exposure to the money market.

As the table below shows, the volatility of these funds can differ quite substantially. The third column shows what percentage of return investors in each fund have seen per percentage of volatility over the past 12 months. The lower the figure, the more volatile the fund has been relative to the return generated.

SA multi asset income fund performance to 30 June 2018
Fund 1 year return 1 year volatility Return / risk
Sasfin BCI Flexible Income Fund A 11.41% 4.01% 2.85
Tower Capital Core Income Prescient Fund A1 10.91% 2.30% 4.74
Fairtree Flexible Income Plus Fund A1 10.55% 1.64% 6.43
BCI Income Plus Fund A 10.52% 0.83% 12.67
Pan African IP Income Hunter Fund 9.88% 1.40% 7.06
MI-PLAN IP Enhanced Income Fund A1 9.36% 1.20% 7.80
Sharenet BCI Income Plus Fund A 9.29% 1.14% 8.15
Momentum Income Plus Fund A 9.26% 0.74% 12.51
Investec Diversified Income Fund A 9.25% 1.07% 8.64
Momentum SA Flexible Fixed Interest Fund A 9.15% 4.83% 1.89

Source: Morningstar

What this shows is that while these funds are all in the same category, they do not all do the same thing. Investors should be aware of these nuances to ensure that they know what they are buying.

Looking over the slightly longer term, the below table shows the top performers in this category over the past three years:

SA multi-asset income fund performance to June 30, 2018
Fund 3-year annualised return
Fairtree Flexible Income Plus Fund A1 11.12%
Saffron SCI Opportunity Income Fund A 10.15%
Sasfin BCI Flexible Income Fund A 10.08%
Pan African IP Income Hunter Fund 9.85%
Abax Diversified Income Prescient Fund A 9.37%
Momentum Income Plus Fund A 9.30%
Element Specialist Income SCI Fund A 8.81%
MiPlan IP Enhanced Income Fund A1 8.76%
Sharenet BCI Income Plus Fund A 8.61%
Coronation Strategic Income A 8.56%
STeFI Composite 7.27%
CPI 5.34%

Source: Morningstar

This shows that these funds have all consistently produced returns of at least 1 percentage point above the money market (STeFI). They have also performed at least 3 percentage points above inflation.

AUTHOR PROFILE

COMMENTS   24

To comment, you must be registered and logged in.

LOGIN HERE

Don't have an account?
Sign up for FREE

If fund returns are thrown around, please also include fees.

Correct, I’d like to see the real rate of return after fees?

I’m assuming this is already the net rate of return, doubt Patrick would compare gross, which is essentially meaningless. But I could be wrong.

Author Patrick Cains is a seasoned journalist; I wonder why he did not include fees? Hiding something, is he. He know that he cannot fool people like @leomalan and the likes.

Unit trust performance is always shown after fees. So the costs have already been taken into account.

Thanks

Muks, you should apologise too, not just thanks.

In the last few years these are the funds to be in. They probably outperformed multi-asset high and medium equity funds. As alternative to balanced funds in a living annuity I would consider a mix of income funds and equity funds. Would like to hear the view from Patrick.

Your assessment would be quite right. Only a handful of multi-asset high equity funds have returned more than 8.0% pa over the last three years. This has, however, been a very unusual period. I would be careful about extrapolating similar performance too far into the future.

With regards to blending income funds and equity funds in a living annuity, that really depends on the specific objectives of the investor. There are too many variables for any one solution to be right for everybody.

“… but once you take into account the tax you pay on the interest earned..” I don’t get this logic because of course the more you make the more tax you pay. Unless someone can offer me a magic bullet other than a 5 year Guaranteed Return Option.

I guess the trick with any fund class is being able/lucky enough to choose a winner. Looks like there are 80 odd funds in this sector, so while the top 10 shown here have done well, there are probably many that haven’t, and lots of people will be invested in those – any idea what the average return is for the sector?

Also not sure what the tax implications are of investing in an income fund that invests in interest bearing assets, but assume they will be taxed in the investors hands accordingly?

Everyone’s tax situation is different, but looking just at the income, the guaranteed 9% currently available on 5 year Fixed rate RSA Retail savings bonds is likely to be a much better option for many.

– For those over 60 liquidity is pretty good – costing just one months interest after the bond has been held for a year.

– If inflation kicks in and yields rise you are able to restart the bond at the higher rate after the first year. This means you get the benefit of guaranteed 9% with upside should rates rise. With any funds holding long term bonds there is only downside when rates rise.

– there are no fees (and no managers taking risks like eskom/sanral or very long duration bonds to justify their fees)

Fundsdata lists the average return of a sector over different time periods (on the bottom of the lists.)

The variance between these ones are not that high but yes it changes, Prescient was consistently topping this category not long ago but now it seems to have fallen a bit and also unlike other multi-asset balanced funds the compositions of these ones are very different from one to the next.
Nedgroup uses convetible bonds; prudential leans heavily on their property tracker, etc.

Its a fascinating category but personally I favor it as an option to be included in a living annuity.

Thanks David

You would be taxes at your marginal rate unless you have it in a tax efficient vehicle, like tax-free account or RA.

For the short term these funds provide good returns , but over the long term even these impressive figures ,wont protect a local investor sufficiently against inflation and SA risk factors .Due to poor governance , a socialist ideology , and lack of skills at government level , SA markets will not provide the historical high returns we achieved over the past 50 years . Rather avoid these good short term investments , and invest globally for long term security . We are the proverbial frogs in pot of water which is slowly heating up , without us noticing it , untill its too late .

@langezand agree with your view. Looking at things from the perspective of a retired person drawing a pension, it would seem prudent to have about 2-3 years income needs in these funds. Then equity assets can be sold at acceptable price levels when needed. Comments welcome.

Returns should always be considered on an after-tax basis. These income funds have a high bond exposure and interest income is taxed at nominal rates. If your tax rate is 45%, yields of 8% become 5.5% after-tax on a 1m investment (assuming R23,800 is tax free).

These funds are probably quite attractive as long as the investor has only small amounts of interest bearing investments, and hence does not give up any real returns to tax.

There are alternatives – you can reduce your “bank” FD investment annually by R 33,000 and put this into TFSA and then buy ETF. I would imagine that Mutual Funds must be feeling some pain as a result of TFSA’s but I have no quantifiable data to back this up.

There has been data published from time to time (almost positive I saw it on moneyweb as well), and the uptake for mutual funds in TFSA’s has been pretty decent.
And since there are no investment restrictions apart from the annual and lifetime maximim on TFSA’s they are ideal vehicles for global equity and property funds.
Most fundhouses I saw advertising and encouraging investors to open tax free accounts. Very few of them havent offered tax free versions of their funds.

Good info. How does it impact on my prudential limits if I access these funds via an RA? Can I boost my equity exposure above the 75% limit using these funds or doi the look through the constituent parts?

No, you can’t, constituent parts are added together.

Thanks!

Due to 17.5% of the invested capital in this whole sector invested in the Coronation Strategic Income fund listed in the 3 year return list most capital got the good return of this asset class. It all then depends do they have the most numbers of investors of do the lower value funds have more investors in numbers.

Load All 24 Comments
No more Comments, leave a reply.

LATEST CURRENCIES  

ZAR / USD
ZAR / GBP
ZAR / Euro

Podcasts

GO TO SHOP CART

Follow us:

Search Articles:Advanced Search
Click a Company:
server: 172.17.0.2