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The case for flexible funds

Why they can deliver better returns than equity funds.

CAPE TOWN – In the current market volatility I was reminded of an interview I did with Rob Spanjaard of Rezco Asset Management a few months ago. He made the very important point that investing is not just about earning high returns when times are good, but being able to defend those returns when the market is against you.

“This is important to understand because if your investment falls by 50% this year, you need a 100% gain next year just to get back to where you were,” Spanjaard explained. “So you might think that funds with the highest upside ratio will be where you get best returns, but they’re not. Over the long term the best performers are the funds that have moderate upside capture, but defend it very well.”

This made me think of the case for investing in South African multi asset flexible funds. This is a heavily under-utilised category, but one that could be of significant benefit to investors.

The reason is simple: over time, every investor should know that they will get the best returns from equity. Historically, this asset class has proven that over the long term it delivers the highest real returns.

The most obvious way for someone to get that exposure in a unit trust is through a general equity fund. And most do.

However, equity funds have an in-built challenge, which is that they are required to invest at least 85% of their portfolios in the stock market at all times. Understandably, this limit is there to ensure that they do what they are meant to do, but it also prevents them from being able to be less aggressive when market conditions warrant it.

Flexible funds, however, follow a different approach. Their asset allocation is not restricted.

This does mean that you get flexible funds with very different mandates, but many of them are essentially equity funds that have the option of defaulting into cash. What that means is that when they no longer see good investment opportunities in equity markets, they can hold cash until things look better for them.

In other words, they have the ability to defend their gains and protect investor capital far better than a pure equity fund can. And this is borne out by how the best of them perform.

The two tables below show the top five flexible funds and the top five general equity funds over the last five years respectively. The second column shows how each of these funds has performed over the last year – a 12 month period in which the JSE lost around 2%.

Top Flexible Funds to 31 August 2015


5 Year Return (annualised)

1 Yr Return

Centaur BCI Flexible Fund A



Imalivest BCI Flexible Fund



Autus BCI Opportunity Fund A



Bataleur Flexible Prescient Fund A1



36ONE Met Flexible Opportunity Fund A



Source: Morningstar

Top General Equity Funds to 31 August 2015


5 Year Return (annualised)

1 Yr Return

Mazi Capital MET Equity Fund A1



Harvard House BCI Equity Fund



Foord Equity Fund R



Momentum Best Blend Specialist Equity Fund A



Imara MET Equity Fund



Source: Morningstar

There are two things that stand out immediately. The first is that had anyone invested in any of the top five performing flexible funds, they would have seen a better return than from any general equity fund over the last five years other than the Mazi Capital Fund.

The second, is that all five of the top five flexible funds over the last five years have secured double digit returns over the 12 months to the end of August. Only one of the top five equity funds has managed to do the same.

There are really two components to this clear out-performance. Stock-picking will always play a role and shouldn’t be discounted. The managers of all five flexible funds have proven records of that.

However it is also significant that these managers haven’t had to be fully invested. They have been able to secure better returns simply by not participating in all of the market downside.

If one looks at the fact sheets or minimum disclosure documents of these flexible funds for the end of July, one can see that all but one of them was holding less than 85% in equity before the dip in August. They were therefore more protected than any equity fund could be.

Total equity exposure (local & foreign) at 31 July 2015



Centaur BCI Flexible Fund A


Imalivest BCI Flexible Fund


Autus BCI Opportunity Fund A


Bataleur Flexible Prescient Fund A1


36ONE Met Flexible Opportunity Fund A


Source: Fund fact sheets/minimum disclosure documents

I have specifically chosen to look at the performance of these funds over a shorter period to illustrate how they react to the kind of environment we are in at the moment. However, what an investor really should want to know is whether this performance is sustainable over the long term.

And if one looks over the last ten years, three flexible funds have delivered better returns than the best general equity fund. The 36ONE MET Flexible Opportunity Fund, Centaur BCI Flexible Fund and Visio BCI Actinio Portfolio all rank above the Foord Equity Fund.

It is therefore evident that flexible funds offer a compelling investment case. And it’s one that investors probably don’t take seriously enough.

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