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Why balanced funds make sense

When you look at the returns investors have experienced.

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
Category 2013 2014 2015 2016 2017
General equity R257.7bn R295.2bn R301.3bn R313.4bn R364.5bn
Multi-asset high-equity R279.7bn R361.4bn R396.8bn R433.5bn R490.0bn
Money market R257.5bn R240.8bn R259.6bn R296.4bn R318.8bn
Interest bearing short term R97.2bn R90.7bn R86.4bn R100.7bn R138.0bn

Source: Asisa

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.

Read: Are you giving up returns by investing in a balanced fund?

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
  Investor Fund Benchmark
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.

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The advantage of a Balanced Fund should be to absord losses in Bearish cycles. The last 3 years have been testing and using Fundsdata its clear that some very large Balanced Funds did not meet that criteria. In the category Multi Asset-High Equity there’s Allan Gray with a return of 7.6%, Coronation with 3.8% and Foord with 2.2% over 3 years. Medium Equity not any better. Guess one should be careful in selecting asset managers in different cycles oor just manage your own combination of Eguity/Bonds/Cash and property.

Balanced Funds are compared as an “area weapon” in military speak…or in personal security speak, using a “shotgun”:

If you know exactly where your target is pinpointed, you can hit it with a G5 Gun-howitzer with only a handful 155mm projectiles. (i.e. that is IF one knows which asset class/sector/global region will outperform in the short to medium-term)

Now experienced asset managers, analysts, economists, specialists from federal reserves, get their annual forecasts wrong at the start of a year. Well half of them at least 😉
In that case, if one is not sure where your target is, but knowing it’s somewhere within a certain map grid…you fire truckloads of Multiple-tube Rockets from a battery of launch vehicles….and take out the WHOLE GRID of the target area.

That way you’ll hit your target (but it’s NOT cost effective). By simply firing at EVERYTHING!

That is in essence the nature of a Balanced Fund….it covers THE WHOLE lot, all asset classes. At least the fund will ‘hit’ something down range, after throwing everything at it 😉

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