South Africa’s top multi-asset medium equity funds

The Investor, Moneyweb’s monthly investment magazine looks at the top multi-asset medium equity funds in South Africa.

South African investors don’t seem quite sure what to do with multi asset medium equity funds. This is apparent by the amount of money that currently sits in this unit trust category.

The latest statistics from the Association for Savings & Investment SA (ASISA) show that the total assets under management in the multi asset medium category at the end of March sat at just R48 billion. In comparison, high equity funds managed R363.3 billion and there was R203.1 billion invested in the low equity category.

For many investors, medium equity funds sit in a place between being aggressive and conservative that makes them neither-here-nor-there. Their 60% equity limit puts them in a kind of investing middle ground.

However, there are some outstanding funds in this segment and they do offer a compelling proposition. They are able to produce returns not that far below high equity funds, but at much lower risk.

Take for instance, the best fund in the medium equity category over the last five years, the 27Four Balanced Prescient Fund. Over this period it has produced a higher return than 85% of funds in the high equity category and has performed well above that category’s average.

Yet, it produced this return with much lower levels of volatility then even most of the funds it out-performed.

This makes these funds ideal for investors who have shorter time horizons, but still want some capital growth. They are also a useful tool for people who are already in retirement looking for lower volatility due to needing consistency of income.

The below table shows the top-performers in this category over the last five years.

Top performing multi asset medium equity funds to 30 June 2015
Fund 5 Year annualised total return
27Four Balanced Prescient FoF 15.78%
SBRO BCI Balanced FoF A 15.64%
AS Forum BCI Moderate FoF 15.56%
MI-Plan IP Inflation Plus 7 Fund B5 15.43%
Montrose BCI Moderate FoF 15.22%
Southern Charter BCI Balanced FoF 14.78%
Indequity Balanced Value FoF 14.21%
Kruger Stanlib Balanced FoF A 13.97%
FG IP Saturn Flexible FoF A1 13.80%
Contego MET Wealth Accumlator FoF A 13.40%
FTSE/JSE All Share Index 18.04%
South African multi asset medium equity category average 12.19%
CPI + 5% 10.70%
Source: Morningstar

Given the bull market experienced in equities over the last five years, it is not surprising to see these funds all easily outstrip a target of inflation plus 5%. Investors have enjoyed some very good risk-adjusted returns over this period.

However, the good times may well be coming to an end, and some of the fat put on over the last 60 months may be needed to carry investors through some leaner years ahead. One should expect the CPI + 5% target to be a lot harder to meet going forward.

The predominance of fund of funds in this category is also quite clear, with nine of the funds on this list using this approach. An important consideration for investors in this environment is to scrutinise the fees you pay, as the layering can potentially add a lot to the overall cost.

The total expense ratios (TERs) on these funds can differ quite significantly. One can pay anything from 1.14% on the MI-Plan fund to 3.14% on the SBRO fund and 3.37% on the Montrose fund.

You also need to be aware of what you are paying for. It is questionable, for instance, whether a fund manager really deserves a fee for simply taking three or four other balanced funds and blending them together in equal proportions. That wouldn’t appear to be adding a degree of sophistication that any semi-financially literate investor couldn’t do themselves.

A fund of funds manager who is really adding value is one who is both making asset allocation decisions, and identifying the best managers within those asset classes to produce the best risk-adjusted returns.

That is expertise worth paying for and is something that 27Four has become very astute at doing, hence its position at the top of the list. At a TER of 1.31% the Balanced Prescient Fund is also one of the most well-priced funds in this category.

The AS Forum BCI Moderate Fund also has a very good record with this approach, although at higher cost. It has an extremely well-diversified portfolio, giving investors’ exposure to a range of fund managers, asset classes and geographies.

Taking a longer-term view, the below table shows the top performers over the last ten years.

Top performing multi asset medium equity funds to 30 June 2015
Fund 10 Year annualisedtotal return
Indequity Balanced Value FoF 12.68%
Coronation Capital Plus Fund 12.58%
Absa Balanced Fund R 12.57%
Stanlib Multi-Manager Medium Equity FoF A 11.79%
Contego MET Wealth Accumlator FoF A 11.30%
FTSE/JSE All Share Index 17.14%
South African multi asset medium equity category average 11.30%
Source: Morningstar

Only five funds are included on this list, as there are only 16 in this category with ten-year track records. Of the ten funds on the five year list, only two have been around for longer than ten years, and both of them appear in the table – the Indequity Balanced Value FoF and Contego MET Wealth Accumulator FoF.

Three of the larger asset managers – Coronation, Absa and Stanlib – appear here, after being conspicuously absent from the five-year list. Given the dominance of smaller funds over the shorter period, it will be worth watching whether they can out-perform over longer time frames as they grow their track records.

It is also worth noting that the levels of above-average performance are smaller in the ten-year table. This is due to having a much reduced sample, but also because this is a period that includes the market downturn of 2008, and does not just reflect a market bull run.

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