Have multi-asset funds lost their balance?
Another torrid quarter for investments aimed at giving those planning for their retirement the best equity
It has been five years of patchy returns from SA balanced funds that invest across the asset classes, and now, to top it all, many are showing large losses for the past quarter.
This quarter’s erosions are so severe that some multi-asset funds now have losses on their average returns for the past five years.
Five years is a key measurement period for these funds, which are supposed to tilt towards the winning asset classes to earn inflation-beating returns for retirement investors. But of some 500 low, medium and high equity multi-asset funds, there are only about 37 that have outperformed the average 5.2% inflation rate for the period.
At their lowest exposure to equities — less than 40% — these funds should give you 2% more than inflation and funds that can invest up to 75% in equities typically target inflation plus 3% to 5% over rolling three or five-year periods.
The unit trust sector’s recent poor track record led Pieter Koekemoer, head of personal investments at Coronation Fund Managers, addressing the recent Investment Forum, to ask “are balanced funds just battered and bruised or [are they] bombed and broken?”
Diversifying across asset classes is not an investment model that is broken, but over the past five years there has not been enough beta, or return from financial markets, Koekemoer said. He says Coronation’s balanced fund has a 24-year track record over which period it has outperformed not only inflation by 7.9% a year, but also the JSE as measured by the all-share index and global equity markets as measured by the MSCI world index.
Koekemoer says more than 40% of multi-asset fund investors’ money is in three balanced funds — those of Coronation, Ninety-one (Investec) and Allan Gray. They have all outperformed inflation by more than 7% since their launch 20 years ago.
Koekemoer says this proves that experienced single managers are best placed to not only select shares, bonds and other investments, but also manage the balance between asset classes to deliver above-inflation returns that are smoother than those equity investors enjoy.
At the investment forum, Victoria Reuvers, MD of Morningstar Investment Management, that assists advisers to construct portfolios, also tackled the poor returns over five years in a panel discussion titled “The Balanced Fund Conundrum”.
The likely impact of the coronavirus was to some extent predictable given what was happening in China, making it less of a rare black swan and more of 'a grey rhino'.Rezco Value Trend fund manager Rob Spanjaard
But Reuvers says she agrees with Koekemoer that the balanced fund model is not broken — it has been an unprecedented time in investment markets. She pointed out that the poor returns had resulted in many investors withdrawing from balanced funds and moving mostly to fixed income funds buoyed by good bond and money market returns.
Multi-asset funds inflows were minimal in 2017 and 2018, and R21bn left these funds in 2019, while fixed income benefited from R105bn of inflows. About R4bn went into funds invested in global markets, where investors have enjoyed very good returns for four of the past five years.
A yardstick to measure what balanced funds should have at least been able to achieve given the market returns is a composite index with a static allocation to the indices for each asset. Check your own fund’s returns on its fund fact sheet.
Old Mutual calculates a balanced fund index with set or static allocations reflecting a benchmark for the high-equity multi-asset funds. It has a 70% allocation to shares, including those in listed property — with two thirds in the JSE and one third globally — 22.5% in local and global bonds, 5% cash and 2.5% gold.
This index is showing a real (after-inflation) return of minus 11.65% for the first quarter of 2019, and negative real returns over one year of minus 5.58% and minus 2.54% for the five-year period.
But Old Mutual’s latest long-term perspectives publication shows that investing in balanced funds has been good for investors over the long term. The index’s long-term average return from 1930 to the end of last year is 12% — beating inflation by an average of 5.8% a year.
Index-tracking balanced funds, the Satrix balanced fund and the Nedgroup Investments Core Diversified Fund, with static allocations to the asset classes, have delivered average annual returns of just above 1% a year over the past five years to the end of March 2020, while the passively managed Sygnia Skeleton 70 Fund, which tweaks its allocations in line with the manager’s views, achieved just 2.39% a year.
Investment products platform iTransact reports that its Regulation 28 growth portfolio made up of exchange traded funds (ETFs) has achieved an average annual return of 3.41% over the past five years — better than the returns of all but about 20 of the more than 200 unit trust funds with a five-year track record in the multi-asset high equity unit trust subcategory.
In the multi-asset flexible fund subcategory where managers have the freedom to choose the asset classes in which they invest and to take their offshore allocations beyond the 30% limit that is imposed on funds retirement investors must use, the range of returns is as steep as it is among the high-equity balanced funds: from -7% to +9% a year over the past five years. And the average annual return for these flexible funds over five years is 0%, which is below the 1.15% a year that high-equity balanced funds have achieved.
Managers are not traders that react to shorter-term market movements. They invest in shares and other securities based on the value they believe will be unlocked over the longer term.Morningstar Investment Management MD Victoria Reuvers
Reuvers says investors must be careful not to fall prey to the recency bias and extrapolate forward recent trends. The poor returns from the local equity market reflect a lost decade of economic growth, but investors should also not forget that the decade from 2000 to 2010 was a lost decade for the US.
Though it might not seem possible now, the rand is currently oversold and could strengthen, which is why it is better for managers to invest where they see attractive valuations rather than a binary view of SA vs offshore markets, she says.
One of the top 10 high equity multi-asset funds on performance over 10 years is the Ninety One opportunity fund. The fund had its full 30% in offshore markets at the beginning of this year and only 30% in the local market, with a bias towards quality companies best able to withstand economic contraction.
The top fund over 10 years is the Rezco Value Trend. Its manager, Rob Spanjaard, moved his fund out of global and local equities before the market crashed in February. Spanjaard told the investment forum the likely impact of the coronavirus was to some extent predictable, given what was happening in China, making it less of a rare, unpredictable black swan as many managers claim and more of “a grey rhino”.
Reuvers says, a benefit of smaller managers is their ability to make such big asset allocation moves in short periods of time. Managers are not traders and you should not expect them to react to shorter-term market movements. They invest in shares and other securities based on the value they believe will be unlocked over the longer term, she says. But managers’ returns do vary widely and in some cases reflect poor investment process, Reuvers says.
Koekemoer says if you invested equally in the balanced funds of Allan Gray, Coronation and Ninety One you would have earned higher average returns for the last decade than the average returns earned by all multi-managed funds and all broker or adviser’s fund of funds. The broker fund of funds had the widest dispersion of returns over 10 years, he says.
But Reuvers says the averages fail to reflect that there are individual multi-managed and adviser funds that have performed well over the past decade.