According to the latest statistics from the Association for Savings and Investment South Africa (Asisa), balanced funds are by far the most popular choice among local investors. Nearly a quarter of all the money invested in South African funds is in the multi-asset high-equity portfolios.
As the table below shows, this popularity has also been increasing over the last few years.
|Assets under management in SA fund categories|
|Interest bearing short term||R97.2bn||R90.7bn||R86.4bn||R100.7bn||R138.0bn|
Given how much money is going into these funds, it is worth asking whether investors are choosing wisely. Is this the best place to be putting their money?
Earlier this year, Moneyweb looked at whether investors are giving up returns by investing in balanced funds rather than pure equity mandates. The conclusion was that the average multi-asset high-equity fund had actually outperformed the average equity fund in South Africa over five-, ten- and 20-year periods.
This certainly suggests that choosing lower risk balanced funds over equity funds has been a very smart thing for investors to do. They have not only reduced the volatility they experience, but also earned higher returns.
A fair criticism of that analysis, however, is that it takes a very broad average. It also looks at the returns of funds, rather than the return that investors have received as they may have moved in or out of those funds at different times.
It is therefore worthwhile to take the question a bit further to see if a more specific, and therefore more useful, comparison can be made. Is it possible to tell whether individual investors have been better off in balanced funds, rather than just taking an average?
This is not easy to do as this data is hard to come by. However, Allan Gray has conducted an analysis that is as close as one is likely to get at the moment.
In order to try to understand investor behaviour in its funds, Allan Gray has scrutinised the money-weighted return of the total flows into and out of its equity and balanced funds. In other words, it has calculated the return earned on the average rand invested in each portfolio.
This is not, strictly speaking, the average investor return, as it will be heavily impacted by the behaviour of large investors moving large sums into or out of the funds. Nevertheless, it provides a good picture of an ‘investor return’ rather than a simply ‘fund return’ over a period.
The table below shows the annualised returns over the ten years to December 31 2017.
|Ten-year annualised returns|
|Allan Gray Equity Fund||11.80%||11.10%||9.70%|
|Allan Gray Balanced Fund||11.50%||10.90%||8.90%|
Source: Allan Gray
What this indicates is that an investor in the Allan Gray Equity Fund would have, on a pure return basis, come out slightly better than one in the Allan Gray Balanced Fund over this period. This is, however, by only a very small margin, and at a lot more risk.
On a risk-adjusted return basis therefore, investing in the balanced fund would have been the better option.
“It does hold up that the average rand has made a good choice in the balanced fund relative to the equity fund,” says Shaun Duddy, a business analyst in Allan Gray’s product development team.
As Allan Gray manages the largest funds in both of these categories, this is also a meaningful sample. Even though it can’t be extrapolated across the whole market by any means, it does show what a large percentage of investors have seen over this period.
What is also interesting about this analysis is that the average investor return is actually higher than the fund return. This is not what one would expect, given that it is well established that poor investor behaviour generally results in reduced returns.
As Duddy explains, however, as these funds have grown larger, the flows into and out of them have become a much smaller percentage of the total, and therefore the difference between the fund return and the average rand return has shrunk. The difference between the investor return and fund return is therefore small enough to be largely insignificant.
At the same time, these funds have experienced strong positive performance over this time, but have generally seen net outflows. This means that, on average, investors have been selling on the way up, rather than the way down. This would be considered good investor behaviour and would naturally lead to higher average rand returns.