STEADY LOW EQUITY FUNDS

With R211bn under management, the low equity category is the fourth biggest in the unit trust sector after high equity funds, general equity funds and money market funds.

There are some giant funds such as Coronation Balanced Defensive with more than R40bn under management, Allan Gray Stable with R35bn and Nedgroup Stable with R32bn. The Prudential Inflation Plus fund has R34bn and is in the category but it is managed on an absolute return basis and unlike the other funds reviewed here is not an Allan Gray Stable clone.

Allan Gray Stable and its most successful clones, Coronation and Nedgroup, have become the defaults for many financial advisers as a low risk investment for their clients close to or in retirement. They live up to their name of Stable: in its history Nedgroup Stable has had a maximum drawdown (loss) of 4,2% while over the same period equities have lost 40,4% at their worst, bonds 7,9% and even global cash has fallen 35,2%.

There has been a strong rivalry between these funds. Allan Gray Stable was formed in July 2000 and proved to be extremely popular with the public. Coronation recruited Charles de Kock, the son of a governor of the Reserve Bank no less, from Old Mutual to play the role of Mr Stability and to be the face of its new Stable fund, which it called, for fear of being accused of imitation, the Balanced Defensive fund. De Kock was the perfect choice for the fund, not only because of his reassuringly calm manner but because he ran the fund exceptionally well. It is a first quartile fund over three years and comfortably ahead of Allan Gray Stable over 12 months.

Nedgroup operates a “best of breed” model and needed to find a house to run its stable fund. It was fortunate to find Foord Asset Management was willing to run the fund. Founder Dave Foord made it clear he would not run a low equity fund under his own name. He does not believe it makes sense to keep your assets in such a fund for the long term — a balanced or flexible fund is a more logical choice for the long-term view, he argues.

But he has been happy to run a fund for Nedgroup which has been a success for both parties. It is a top quartile fund over one and three years and has been conservatively positioned for today’s choppy markets.

In this month’s IM we also look at two medium-sized funds: the R9bn Investec Cautious Managed and the R8bn Stanlib Balanced Cautious.

Investec would argue that its Cautious Managed fund is not a clone of Allan Gray Stable. It is modelled on the Investec Cautious Managed fund in the UK. The South African version was launched in April 2006, ahead of the Coronation and Nedgroup clone funds. The fund was originally run by Sam Houlie, the maverick portfolio manager who was previously head of Absa’s asset management business.

It is now run in the arguably safer hands of the so-called “quality” team (as opposed to the cheap and nasty team?) of Clyde Rossouw and Sumesh Chetty, who also run the R36bn Investec Opportunity fund. Rossouw’s deep experience of equity markets and Chetty’s experience as an investment actuary have proved to be a strong combination which is above average over one and three years.

Stanlib Balanced Cautious was the last fund through the gates, having started in December 2008. But as an instinctively conservative house (most of its assets are life money, after all) Stanlib should have a competitive product in this space.

Fund managers Robin Eagar and Warren Buhai had a stubbornly third quartile performance over three years, but over a year they are right on the median. The acid test will be the rest of the year.

Eagar believes we are in a bubble as the US market has reached unsustainable levels and the largest losses occur when valuations are high. The South African market is also trading at very high levels relative to history.

In the past, bonds have acted as stabilisers when equities fall, but there is very little scope for bonds to increase in value from these levels.

“Based on prevailing market conditions we have no evidence on which to accept market risk at this point, therefore we do not take market risk.

“Number one priority is to make sure our clients have set capital aside to take advantage of a correction to achieve their long-term goals.”

Stable funds might have small drawdowns but they remain a better long-term bet than money market or fixed income funds, without the threat of a permanent loss of capital from pure equity and high equity funds.

The South African market is also trading at very high levels relative to history