Multi-asset funds' lustre dulls for many
An "unprecedented" three years in local investment markets has left many balanced or multi-asset investors wondering just what exactly their advisers and asset managers are doing for them, according to financial planners and asset managers who addressed the Financial Planning Institute's recent annual conference.
Craig Gradidge, an independent financial planner at Gradidge Mahura Investments, says it is increasingly difficult for investors to accept the message that they need to remain invested for the long term after many South African multi-asset funds failed to meet their investment growth targets.
Advisers typically recommend high equity multi-asset funds for retirement annuity or retirement fund investors as these target returns of inflation plus 5%.
But many of these funds have failed to meet this target over the past three years.
Pieter Koekemoer, head of personal investments at Coronation, says it has been a very unusual three-year period of grinding equity returns and a convergence of multi-asset fund returns.
He says the period is unprecedented in the past 20 years as over the past two decades in at least one out of every three years, equities have "shot the lights out" and delivered a good return.
Part of the reason multi-asset funds have underperformed is that the market has been narrow with a few mega stocks, such as Naspers, delivering between 20% and 80% of the returns.
"Very few fund managers would be brave enough to have close to the market capitalisation index value in one share because, depending on the index you used, that would mean 17% to 22% of the equity exposure would be in one share." Koekemoer says in lower-risk funds, such as Coronation's low-equity multi-asset fund the Balanced Defensive Fund, the equity exposure to one share is limited to 3% of the fund.
Many funds have used derivatives to manage the risk of a market fall at a cost to the fund of up to one percentage point a year, but a lack of volatility over the past three years has resulted in no benefit for this additional cost, Koekemoer says.
Returns of 8% to 9% from multi-asset income funds as against returns of 7% to 8% from multi-asset funds with exposure to equities have resulted in many pensioners with living annuities reducing their investment risk.
Koekemoer says that over the past 12 months some R20-billion has been withdrawn from low-risk multi-asset funds and some R40-billion was invested in income-focused funds, mainly managed income funds with a target of inflation plus 2%.
But responding to short-term performance can do "very harmful things to your long-term wealth", he says. Both he and Andrew Salmon, chief investment officer at Old Mutual Wealth, say markets can, and have, changed very quickly.
Koekemoer says that at the end of June, if you had invested in the FTSE/JSE Capped All Share index, with the maximum weighting of any share capped at 10%, the three-year return was 3.5% a year. By the end of September, this had become 7% a year and this week the return was above 10% a year.
Salmon says this shows how important it is to be well-diversified in assets with good valuations (earnings relative to price) and then to stay the distance because you can't predict what will happen in the markets.
Sumesh Chetty, a portfolio manager at Investec Asset Management, warns that there is a big opportunity cost to being invested in cash or income funds because equity markets could continue to drift upwards for another two or three years.
Typically when interest rates are low, when there aren't any significant economic stresses such as interest rate hikes, when monetary policies are stimulating the economy, equity markets can go up much further than expected, he says.
Chetty says although global markets are looking expensive with price to earnings multiples of 25 on the S&P500 index and 20 times on the local market versus the long term averages of 16 and 12 there are still some opportunities.
High-quality global companies are generating 18% a year in earnings, paying some as dividend and investing the rest for future growth, Chetty says.
Among South African assets, excluding rand-hedge shares with a high proportion of offshore earnings, bonds are the best risk-adjusted assets you can buy today, Chetty says.
Although people think about the political risk to local bonds, he says, the crucial issue for investors is that the yield on South African bonds is 1.7 percentage points higher than what you can earn from other emerging-market government bonds.
The absolute worst is priced in to government bond yields and the real returns are still between 4% and 6%, giving you the potential to achieve a return of inflation plus 6%, he says.
Salmon says Old Mutual also favours local bonds to deliver a real (after inflation) return and currently its two big bets away from its strategic or fixed-asset allocations in its multi-asset funds are in favour of local bonds and global equities.
However, Guy Hewlett, the deputy chief investment officer of Argon Asset Management, says growth will be hard to find in an era of such high government debt levels.