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Big players get bigger in the balanced fund space

As uptake increases significantly.
The Allan Gray Balanced Fund has grown from R23 billion to over R150 billion in the past decade. Picture: Moneyweb

Over the last decade the amount of money invested in South African multi-asset high equity funds, or balanced funds, has grown from around R50 billion to more than R510 billion. This is now comfortably the largest unit trust category in the country.

Over this period the number of balanced unit trusts available to local investors has also shot up – from 70 to 233. Yet despite this proliferation of new portfolios, the largest funds have actually become more dominant.

According to investment firm Corion Capital, the five largest balanced funds accounted for 58% of all assets in this category 10 years ago. They now manage 68%.

“The South African investment landscape has been dominated by these big asset managers due to a combination of factors,” says Corion Capital CIO David Bacher. “Over the last 15 years, the likes of Allan Gray, Coronation and Investec have all been top decile performers. They also have the largest marketing spend and the biggest distribution.”

The big getting bigger

The Allan Gray Balanced Fund is the best illustration of this. It has grown from R23 billion 10 years ago to over R150 billion today. As the video below illustrates, its position as the largest unit trust in this category has been unchallenged, even as the rest of the top five have vacillated.

 Source: Corion Capital

While this may be interesting, a better question is whether it is meaningful. Does it matter that there is such a concentration in large funds?

“The pros are that generally people find safety in the well-known brands,” Bacher says. “They understand what they are investing in, and are less likely to get large variability of investment returns.

“The cons are that the bigger you are relative to the industry you invest in, the harder it is to implement your best investment view,” he adds. “And that, in my opinion, is a significant weakness. The other factor is market economics. The more competition there is, the better it generally is for the end consumer in terms of pricing and innovation.”

How things have changed

It is therefore worth reflecting on how different the industry was at the turn of the century. Then the large life assurers like Old Mutual, Sanlam and Liberty dominated the unit trust market. However, they have since given way to independent managers like Allan Gray, Coronation and Foord. So could something similar happen again?

“I think there is opportunity for smaller managers, and you are seeing a bit of evidence of how they are able to outperform,” says Bacher. “You are starting to see the next tier of players like Laurium, Mazi Capital, Fairtree, 36One, Visio and Truffle growing.”

However, while these managers are delivering on performance, they remain at a significant disadvantage when it comes to marketing budgets and distribution. Investors therefore remain more likely to select an established manager.

This is not because investors have a particular issue with investing in smaller funds. The barrier is the lack of familiarity.

“We’ve seen this even in the context of large overseas funds that South Africans don’t know,” explains Warren Ingram, executive director at Galileo Capital. “Four to five years ago we started putting some of our clients’ money into Fundsmiths funds, which are extremely well known and established overseas, but relatively unknown here. We had to have some very lengthy conversations with clients to explain why this should represent even a small portion of their overseas assets.”

Comfort in the big brands

The sense of security investors have in investing with larger managers is not unfounded. There is likely to be far better long-term transfer of knowledge in a big investment team, they should be more efficient in managing costs, and the businesses themselves are more stable.

It’s also worth appreciating that the overall risk to financial advisors is lower when selecting recognised brands.

“If you are an advisor working in a big business, you are not going to get fired for choosing one of the big funds, even if they are underperforming,” Ingram argues. “And if you are an independent in a smaller business and you end up at the FAIS Ombud and have to defend your advice, there is not much risk in choosing one of the large managers.”

This means that even though there is a tier of smaller managers that have become competitive in terms of returns, it’s debatable whether that is enough for them to be truly disruptive.

The passive revolution

Both Ingram and Craig Gradidge, executive director at Gradidge-Mahura Investments, believe that the more likely disruption will come from balanced index funds.

“I think if there is a sustainable threat, it’s probably from the passive side, because the value proposition is fees, not performance, and they are delivering on that,” says Gradidge. “I think it’s already gathering legs in that you see some of the traditional active managers starting passive boutiques and offering passive funds because they see that there is appetite in the retail space.”

Read: Could passive balanced funds rescue local investors?

This does not mean that they expect passive funds to force active managers out of the market. Their expectation is rather that more and more investors and advisors will use them to complement each other.

“We’ve used the Satrix Balanced Fund pretty much from day one, and it’s now the starting point for building any kind of growth portfolio for a client,” says Gradidge.

Ingram says he is likely to give much more attention to balanced index funds than to managers launching new active balanced portfolios.

“I’m very comfortable using established managers in active space, with viable, low-cost passives,” he says. “I think the two together work well.”

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It may be wise to read these 2 posts from Stealthywealthy first
(otherwise you are likely to fall for all your own and other people’s biases! Stealthywealthy has no conflicts of interest that will adversely affect the man in the street!)

“The best RA in SA”
http://www.stealthywealth.co.za/2018/01/the-best-ra-in-south-africa.html

The best Preservation Fund in SA
http://www.stealthywealth.co.za/2018/10/the-best-preservation-fund-in-south.html

In the SA Multi Asset High Equity category over 5 years (i.e the balanced funds= the huge pool of retirement money/RAs, where advisors and fund managers tell you the “professionals will allocate your money and you do not need to worry about asset allocation”…the one where you would think they have their best shot at out-performance), the passives are all near the top (as they are in other categories too, like Global Equity 5 year performances, the other category you may expect fund managers to beat the index, which on average, they do not). The Satrix Balanced, is in position 15/131. The Sygnia Skeleton 70 is also very near the top (21/131) and these 2 have outperformed one of the best active fund managers over many years, the Allan Gray Balanced A fund: note that in comparing to Allan Gray, one is post-hoc cherry picking one of the top-performing balanced funds in SA (the inherent biases in doing so are self-evident). Predictably the passives are all near the top and way above average, despite the potential that asset allocation may allow the professional fund managers (the world and all the asset classes are their oyster and should serve as the ideal platform to show the world their superior asset allocation and stock-picking skills!). Investec Opportunity (31/131), Old Mutual Balanced (49/131) Ashburton 52/131, Coronation (67/131), Kagiso (64/131), Sanlam Private Wealth (84/131), Foord (95/131), Stanlib (120/131) are just a tad off the pace over 5 years! Predictable? What are the probabilities that a combination of any chosen 2 active balanced fund managers will beat the above 2 passives in this category over the next 10 years? Something like 0.1 x 0.1 (1:10 x 1:10) is what the bookies or SPIVA would suggest (the laws of probability would therefore predict a one in a hundred chance?)
http://www.fundsdata.co.za/

The problem with the Nedgroup Core diversified fund, the 3rd passive worthy of consideration (position 15/138), is that it seems as though you need to use an Allan Gray or another platform, which adds a layer of costs, and will diminish the quoted performance? So, it may be wise for the man in the street to watch out for extra layers of costs when accessing passives.

The effective annual cost quoted on Satrix website is 0.87, while Sygnia quotes a Total Investment Cost of 0.63.

Sygnia, while using low cost ETFs, do shift money between asset classes, while using low cost ETFs etc, hence being a bit active. Their unitized life funds may also save some costs. Stealthywealthy has shown how you can even beat Sygnia’s TIC down to 0.43 (this includes platform and all other costs, including VAT)
http://www.stealthywealth.co.za/2018/10/the-best-preservation-fund-in-south.html

While past performance is no guarantee of future performance, the SPIVA performance tables across the world make it highly likely that the above performance of passives will be sustained, even in the category where asset allocation, in principle, gives active fund managers their best shot. The evidence suggest that the probabilities are stacked against them. If nothing else, sit and stare at this website for a long time!
https://us.spindices.com/sp

Most people have biases that cause them to believe that they are better than average (e.g. driving skills, intelligence: there is lots of scientific study of this bias of being above average and one that we all carry) and in the same vein, most people including financial advisors (in selecting funds) and fund managers think that they are better than average. Watch out for “bias bias”! Google it if needed. Somewhat counter-intuitively, by attempting to be average with your investment returns, you will be well above average! Think carefully about that!

PS Old Mutual MM Balanced FOF (from the figure in your article) is in position 105/131

Wow, cool video. Foord’s Balanced Fund wasn’t even in the top 5 until 2011, and then grew from R5bn to R60bn! Now it’s HALF of that at R30bn after poor performance over the past few years. Investors piled in when Foord had great performance, only to see it turn shortly thereafter. Ouch! And as usual, they’re now all leaving in droves… Markets may change, but investors seldom do…

End of comments.

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