High-equity balanced funds struggling

For a lot of high equity balanced funds, the year through March 31 was a tough period.

Many of these funds struggled to generate a real return after fees and in several cases risk-averse investors who invested in the low equity balanced fund of a particular asset manager actually received a better return than their counterparts who chose the high equity fund of the same manager.

Statistics on Collective Investments Schemes from Morningstar show that over the 12-month period, the average return of the local multi-asset high equity fund category was 4.4% compared to 5.7% for the low equity multi-asset category.

The table below highlights the trend on a more granular level and shows the performance of some individual managers included in these categories over the 12-month as well as the 10-year period (where a track record spanning 120 months was available).

(HE = high equity; LE = low equity)

Although there are various factors that could influence performance, over the long-term one would generally expect a low equity balanced fund to deliver in the region of an annual return of CPI plus 4% and CPI plus 6% for its high equity equivalent.

What happened over the past year?

The fishing pond of available asset classes and the performance of these assets explain why high equity balanced funds generally underperformed their low equity peers, says Joao Frasco, chief investment officer at STANLIB Multi-Manager.

A high equity fund’s single biggest exposure would generally be to shares. Over the period the Shareholder Weighted Index (SWIX), a proxy for equity performance, only generated a 2.7% return, adds Richo Venter, portfolio manager at STANLIB Multi-Manager.

A more defensive fund would typically have a higher allocation to cash, which returned 5.9% over the period.

“That really explains why these funds have underperformed,” Venter says.

At the end of March, the average exposure of low equity funds to local shares and cash were 18.2% and 24.2% respectively. This compares to 39.3% and 16.6% for high equity funds.

Venter says the expectation is usually that high equity funds would benefit from a relatively higher global exposure (estimated at around 20% to 25% compared to 15% to 20% for low equity funds) when the rand depreciates to the dollar as was the case over the last year. However over the past year it didn’t offset the muted local equity returns to the extent one might have anticipated.

More defensive mandates also benefitted from exposure to low duration fixed income instruments, he adds.

Venter says over the next three to 12 months they expect equity to underperform relative to other asset classes and they are not very optimistic about property.

“At the moment cash is our preferred asset class.”

Enhanced yield cash instruments is expected to deliver a return of at least 7.5% to 8% in the short-term.

Although there are individual stocks that may be attractively priced and that can deliver alpha, they are not convinced that the local equity market will provide investors with a return of 8% over the next three to 12 months. Against a background of dwindling economic growth, elevated valuations and muted earnings, companies are just not making money, Venter says.

The global equity picture is not a whole lot better and while rand hedge companies could benefit if the rand depreciates, rand hedges like Naspers are expensive.

In the longer term growth could pick up both locally and globally and equities will be a good investment again, he adds.

Against this background, investors should be careful not to shift gears or to make radical changes to their portfolios based on the short-term underperformance of their balanced funds.

Frasco says high equity portfolios can go through periods of massive underperformance, but that same portfolio should outperform over the long-term.

Long-term investors should resist the urge to change their asset allocation based on short-term movements.

During the global financial crisis, when the FTSE/JSE Africa All Share Index (Alsi) dropped from roughly 33 000 to 18 000 points, many young investors saving for retirement switched from a high equity portfolio into cash and were too scared to get back into the market. As a result, they missed out on a significant part of the recovery, Frasco says.

Investors should only change the asset allocation in their portfolios if their long-term needs have changed, De Wet van der Spuy, head of STANLIB Multi-Manager, adds.

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