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The fifth warrior tool: balanced unit trusts

The opportunities and risks with multi asset funds.

Over the last few years, balanced unit trusts have become the most popular category of funds in South Africa. Almost half of all the money invested in domestic unit trusts is invested in funds that take an asset allocation approach.

What that means is that the manager of the fund decides how much of the portfolio to invest in different asset classes like equities, bonds, cash and commodities. Many investors are happy to let fund managers make these decisions for them, because they can be quite daunting to try to do on one’s own.

Balanced funds, or multi asset funds as they are technically known, come in four categories: high equity, medium equity, low equity, and flexible. The first three are rated based on how much of the portfolio the fund manager may invest in the stock market, with high equity funds being the riskiest option, and low equity funds the most conservative. Flexible funds are not constrained at all where they may invest and can choose any level of exposure to any asset class.

These funds earn their name by looking for the right balance between risk and return. Especially for an investor like savings warrior Jolene Porter, who needs to earn a good return to build up enough money for her retirement but can’t afford to take on too much risk, they can be very useful tools.

“A balanced fund probably has a minimum holding period of three to five years, but it is a great long term investment,” says Izak Odendaal, an investment analyst with Old Mutual Wealth. “Beyond five years you will benefit from compound growth, and historically, these investments have beaten inflation.”

Balanced funds can be used for a range of purposes, from saving for retirement to putting money away for a child’s education to building up some capital for a big purchase in the future. Whether you opt for a high risk fund or a lower risk fund will depend on how much time you are saving for.

That is because, even though they are diversified, balanced funds still carry the risk of big market movements. If the JSE were to suffer a big dip, these funds would be affected because of the equity they hold. But of course, the more equity in their portfolios, the bigger the impact would be.

“A balanced unit trust fund will be affected by local and global market movements, changes in the exchange rate, changes in the expectation for inflation and interest rates,” Odendaal explains. “This can be managed by having a long term focus and understanding that the market will recover and deliver real returns if you are patient.”

For an investor like savings warrior Yena Luthuli balanced funds are a useful way to start investing because they take away some of the stress of deciding where it is best to put your money – whether you should be in local or international stocks, bonds, or cash, and in what combination. In a good balanced fund, you leave those decisions up to the fund manager.

Of course one of the big difficulties with any kind of unit trust, however, is deciding which one to use. There are hundreds of multi asset funds in South Africa, and it’s not easy to determine which one will suit you best.

That is why it is important to do know what you need and do your own research to find the fund that is right for your needs.


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