Why Allan Gray’s Tax-Free Balanced fund outperformed its Balanced fund

It all comes down to fees.
Image: Moneyweb

When tax-free savings accounts (TFSAs) were introduced in South Africa in 2015, the National Treasury ruled that no performance fees could be applied.

Most notably, this affected South Africa’s largest unit trust.

The Allan Gray Balanced fund has always charged a performance fee. In order to make it available to investors in a TFSA, Allan Gray was therefore required to launch a separate fund – the Allan Gray Tax-Free Balanced fund – which charges a flat management fee.

Performance fee philosophy
The argument in favour of performance fees is that they align the interests of the fund manager and clients. If the fund does well, both the manager and the client are rewarded. If it does poorly, they share the pain.

It is important to be clear that this is not the case with all performance-fee structures in South Africa. In fact, most are asymmetrical, in that the fund manager earns a flat fixed-base fee regardless of performance. That means that they feel no loss when the fund underperforms, but help themselves to a share of the upside.

Allan Gray, by contrast, employs symmetrical performance-fee structures. The manager will earn a higher fee when the fund outperforms its benchmark and a lower fee when it underperforms.

Performance analysis
The launch of the Allan Gray Tax-Free Balanced fund has, however, allowed investors to compare the performance of this fund, which does not charge a performance fee, with that of the original Allan Gray Balanced fund to see which ultimately delivers a better outcome.

The Allan Gray Tax-Free Balanced fund was launched in February 2016. Calculated monthly, there have been 47 rolling one-year periods since that point. Analysing the relative performance of the two funds over these periods is revealing.

For 33 of them, the Allan Gray Tax-Free Balanced fund has outperformed the Allan Gray Balanced fund.

For six of these rolling one-one periods, the funds performed on par with each other.

In only eight instances did the Allan Gray Balanced fund outperform.

In other words, the version of the fund charging a flat fee outperformed 70% of the time. It only underperformed 17% of the time.

A simple point-to-point performance analysis is equally conclusive: Since the start of March 2016 (its first full month in existence), the Allan Gray Tax-Free Balanced fund has returned 5.0% per annum. The Allan Gray Balanced fund has returned 4.6% per annum over the same period.


This would appear to offer conclusive evidence that performance fees do not lead to better outcomes.

However, Earl van Zyl, head of product development at Allan Gray, told Citywire that it is important to note that while the two funds are similar, they are not exactly the same.

“Asset allocation between the two funds can be, and has been meaningfully different,” said Van Zyl. “It could differ as much as a few percent within an asset class. That has made a difference to the gross returns of the two funds, which has been enough to make a difference to the net return to clients.

“As a simple example, at the end of November 2020, the balanced fund had returned 3.0% for the year with a one-year TIC [total investment charge] of 0.88%, which, very roughly, is a gross return of 3.88%. The tax-free balanced fund returned 3.4% with TIC of 1.61%, for a gross return of 5.01%.

“This is a very rough approximation, but it illustrates that the differences in outcomes between these funds are significantly about both the differences in asset allocation and fee structure.”

The question that argument raises, however, is why the asset allocation differences would consistently favour one fund over the other when they are managed by the same team.

A possible explanation that Van Zyl offered is that fund flows have affected the ability of the portfolio managers to exactly match how the funds are positioned over time.

“One of the big differences in the funds is that clients have been withdrawing from the Balanced fund over the past few years on a net basis, but have been contributing to the Tax-Free Balanced fund,” said Van Zyl. “The difference in flows and the timing and sizes of flows means that the portfolio managers can’t always match the asset allocation of each fund exactly where they are buying and selling securities.”

Nevertheless, investors should ask whether it is telling that the fixed-fee fund has consistently outperformed.

If performance fees are, ultimately, meant to lead to better outcomes for clients, why has this not played out in practice with these two portfolios?

Van Zyl said that it is important to note that, over the past few years, investors have actually paid a lower fee in the Balanced fund than in the Tax-Free Balanced fund. The three-year TIC on the former is 1.34%, compared to 1.67% on the Tax-Free Balanced fund. Over the past year, it is 0.88% compared to 1.61%

This, he said, is evidence that performance fees are working in the way they are meant to.

“Our argument is that performance fees align the fee that is charged in the fund with the performance of the fund,” said Van Zyl. “That is what you see. The performance of the Balanced fund has gone down in the last year, and the fee has come down. Whereas the fee in the Tax-Free Balanced fund has remained flat.

“We would not argue that the Balanced fund will always outperform because it charges a performance fee. We are charging a performance fee because the client fee experience will vary with the performance generated relative to the benchmark. That should encourage clients to stay invested in periods of lower or under performance.”

Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.


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The thing about performance fees is that the asset manager determines what the benchmark for this fee is. This is not a standard definition but one created by each asset manager as he sees fit. The AG Balanced fund sits in the category South African MA High equity. Currently there are a 199 funds sit in this category. This means that we 199 fund managers with more or less the same mandate. If you are going to earn a performance fee should you not have to be better than the other managers who are in your classification?
Why should you earn a performance fee when you are 133 out of 199 funds?
This is Allan Gray Balanced fund over one year. Over three years they sit at 131 out of 176 funds. The majority ( by some way) of the fund managers in the Balanced fund High Equity category have given better returns over this period than Allan Gray but it is still possible for them to earn a performance fee. A performance fee for mediocrity?

I suggest you read the latest AG Balanced fact sheet and there you can refer to the benchmark and the performance fees for 1 and 3 years. The article conflates performance fees and total investment charges.


The current 1y fees in the AG Balanced Fund are quite low by South African standards (<1%), although this will quickly change if there is outperformance relative to their peer group.

I am not sure if relative performance calculations are affected by the tax treatment of dividends.

Thanks for pointing this out @Lemon.
Love it how stating the truth received a couple of thumbs-up, whereas the original message got almost 3 dozen…

local withholding tax is payable in the hands of the investor – so doesnt affect fund performance returns. only the foreign withholding tax impacts fund returns but would apply equally for both funds

Survival bias is ever-present. Graphs that look impressive, because of early outperformance lead to apparent outperformance, which is not borne out by careful scrutiny, and survival of the fund. If you believe the myth that there are a few fund managers who outperform over the long-term due to skill, read this:
The Better Letter: Forecasting Follies – The Better Letter (substack.com)

In 2010, five U.S. equity fund managers were nominated to be the fund manager of the decade for their outstanding performance over the previous ten years. Over the ensuing decade, exactly zero of the five outperformed. The average subsequent underperformance of the five nominees was 5 percentage points per year. The “best” fund manager of the decade (through 2009), over the following decade (through 2019), underperformed by 8 percentage points per year.

Allan Gray I’ve found to be somewhat expensive, for all the ‘active’ management etc etc, it’s just easier to go with ETFs in a TSFA account, low cost, better performance.
Stick with the cheaper options, Sygnia, Gryphon, Easy Equities and sit back and relax, watch the values go up over time.
I’ve had some allocation to Allan Gray for sometime now, and am not happy with the return considering the fees been paid.
Performance Fees are good idea, except when the benchmark is peer group, maybe JSE Allshare or something harder to beat.

Their returns have been poor. They should be refunding their fees to the clients that have lost money. If they are such hotshots then why can’t they even get a return equal to inflation.
I have heard the the bonuses paid to the staff are HUGE! No wonder when you are earning R 1,4 billion on the balanced fund alone. Nice work if you can get it.

I struggle for words…a huge fuss about an insignificant fee differential and no-one even mentions the colossal elephant in the room; NEGATIVE POST-INFLATION RETURNS!!!

Anyone, I mean ANYONE, who does a tiny wee bit of research & manages their own funds can beat this by a COUNTRY MILE!!!

According the fact sheet, they have R 136,3 billion in the fund. At an annual fee of 1.03% they earn R 1,4 BILLION a year just from this fund. Then they still want a performance fee if they do better than the average fund manager. So in a good year they could easily earn R 2 billion in fees. Why do other fund managers charge less than half of what they do and outperform them? Why an investor would want to stay with them beats me. Maybe its the great advertising?

Fund managers face a tough future :

Why are the fees for managing a R100 billion fund a thousand times more than managing a R100 million fund when they involve exactly the same allocation and selection skill and effort?

I don’t pay my dentist according to my balance sheet.

I guess you could have the same argument about transferring a property. The lawyer charges you based on the value. A R 1m house takes the same work as a R 10m house, but the fees are 10 time more.

Would Dividend Withholding Tax perhaps have an impact here too?

I self manage my portfolio and obtained a 9.82% return net of fees using a blend of Sygnia and Satrix ETFs and bond funds over the last year.

That is more than double what the allan gray fund did. I only have a matric certificate and access to google and am able to beat these guys charging an arm and a leg for their “Expertise”.

Do yourself a favor and move to sygnia!

Interesting BrianB – double checking this is for a tax free investment? I am keen!

This was in my RA since they are referring to a balanced fund (considering reg 28) its a fair comparison.

My TFSA was luckily in the Itrix 4th industrial revolution ETF and that is up over 70% (i don’t think Allan Gray has a single fund that did that).

Sygnia beat Allan Gray on all fronts. Fees and returns.

I’ve always understood that Dividends Withholding Tax (DWT) is taken off the performance of the fund in the fund itself – not paid separately by the investor. That would also explain part of the outperformance of the tax-free version of the AG Balanced Fund. Correct me if I’m wrong.

You are not wrong. JSE Top 40 Divs average about 3% pa over last 3 years..at least half of the overall performance. Take away 20% of that and you have your answer. The TFSA must always outperform in fact.

What exactly are we paying for? Every single one of my Satrix and Sygnia ETFs has done at least double that in the last 6 months…..!!! Asset managers are ripe for disruption. The growth in ETFs and platforms like EasyEquities has already seen the likes of AG and Coronation seeing net outflows from their retail funds….and it’s been happening for some time…..

I don’t necessarily agree that the difference is due to performance fees. I mean you have the same team managing both funds, and as stated one fund has a higher gross return than the other – being the tax-free version of the Balanced fund. The key argument that has been missed here is what role a fund size has on returns. Given same team which means same investment philosophy, the main difference between these two funds I see here is actually fund size.

facts are this TaxFree Balanced fund is 1bn and the balanced fund is 130bn i.e. 130 times bigger. So likely the smaller tax free fund is better at managing cash drag by purchasing/selling stocks without moving the market, which is a big advantage over the larger fund. the bigger fund should have more liquidity issues when trying to sell to pay out big redemptions mentioned in the article. So it’s easier for the small fund to quickly sell down a sasol investment for example without moving the market vs the bigger fund.

Also given reg28 restrictions, does the bigger fund have the same opportunities as a smaller fund on a shrinking pool of listed companies on the jse? – probably not.

When I finally disinvested from SA, I went through Nedbank and CREDO. For my happy effort they charged me 1% of my wealth to sell and 1% of my wealth to buy, plus GBP250 plus a whole lot of other little charges. This was considered good…until I grew gatvol at the (let’s be general, it’s not just Nedbank) money skimming thieves.
I opened a free international bank account with Standard Bank on the Isle of Man, getting 4 transactions a year free, not requiring a min balance and so on. (I think this is a great deal, and I got great service from them.) Then I signed up with Interactive Brokers of London (if anyone has anything to say about them I would be grateful.) Now, I pay GBP 2 per transaction. A massive difference. I have a choice of any security in the world. In the last 2 months I have achieved 4% return on my pounds.
My biggest problem is coming up with a stable opinion in the wild global waters. Wondering whether to follow Ray Dalio’s approach to maximal diversity with beta balancing or whether to invest in Cathy Woods supercharged performing tech funds. At the moment I have plucked inflation linked treasury securities. I have lots in tech indices but feel tempted to be more targeted than bloated index over capitalization.
I have investments in the EuroStox50 and so on.
I wish Moneyweb was more broadly investment centric. They always choose to focus on the South African disaster, with all the investment advisors making light of it.
The great reset of Covid is changing the world. We are pivoting now.
Trillions of dollars are going to be freed up with autonomous driving. Whether in the cost of labour, the savings from not owning your own car, but just calling one up, uber style, but driverless, the insurance implications…the list of benefits just goes on and on. And that is just the transport opportunity. What about Bitcoin, AI, robotics, bioinformatics, fintech. Being invested in these massively scalable pivoting industries that are going to change the world and disrupt everything as we know it. If you are not invested in it, having heard about it, bro, you are foolish. Why is Moneyweb not covering this sufficiently?

What I hate about asset managers is that they are aware that their choices of shares in their Unit Trust(UT) are going nowhere but down. Do they do any changes after 6 months doing some market research. No they don’t. Now after a year they should and the only changes that they make is the percentages of the shares they hold in that UT. It frustrates me no end.

Allan Grey performance fees does not match their performance!

Switch to Sygnia of 10X!

End of comments.



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