Medium of growth and security

Medium equity is a category of funds with a maximum equity exposure of 60% and typically, though not always, at least 40% in equities, the maximum for the low-equity category. The medium-equity category is quite niched, with R51bn under management, compared with R400bn in high-equity funds and R230bn in low-equity funds. And 40% of this money is accounted for by one fund, Coronation Capital Plus.

Some pension funds offer all three categories in their member-level investment-choice programmes. Many large fund groups do not have a single manager fund in the category, instead opting for a multimanager fund. Old Mutual has a couple of niche funds in the sector, Albaraka Balanced Fund and the Dynamic Floor Fund, but its main contender in the financial adviser market is the Old Mutual Multimanagers Defensive Fund of Funds. Stanlib has the Inflation Plus 3% fund in the category and no less than five funds of funds, including the medium-high equity fund.

The Southern Charter Balanced fund, managed by Mark Thompson and Ursula Maritz, is also in this category, as is the award-winning 27four balanced fund of funds. There are some boutique single-manager funds, however, such as the Aeon balanced fund, run by former Metropolitan chief investment officer Asief Mohamed, and the Counterpoint Moderate fund, run by Steve Mills and Alex Pestana — two refugees from Sanlam. Their old employer hasn’t shown much interest in this category as it just has the clumsily named Sanlam Multi Manager Absolute Solution 5 fund in it.

Many funds in this category have an inflation benchmark, such as the MiPlan inflation plus 5% and inflation plus 7% funds. Like Capital Plus, most were originally constructed for the now defunct Targeted and Absolute Return funds category.

And it is true that medium-equity funds provide a good trade-off between capital growth and capital security. Coronation Capital Plus, the big gorilla in the sector, achieved a 33,8% return at its best in the year to July 2005, but in the disastrous year to October 2008, at the height of the financial crisis, kept the loss down to 6,2%.

Now that people are living far longer in retirement, their advisers are strongly suggesting that for at least the first 10 years of retirement they should consider a medium-equity fund as the heart of their living annuity investment rather than a low-equity fund and certainly in preference to a fixed-interest fund. They should consider the five funds selected in this issue.

It is a mix of funds from three established houses, Coronation, Foord and Abax (which manages the Nedgroup Opportunity fund).

There is one niche manager, Sasfin, and Absa, while too large to be niche, is a work in progress, as it introduces a decentralised franchise system. Its balanced fund, previously run by Errol Shear with respectable returns, has moved to the duo of Kurt Benn and Greg Kettles. Absa is also bedding down its relationship with Schroders. Balanced and other Absa funds have access to two Schroders equity funds, the Core Equity fund and the much more concentrated Global Recovery fund (which is sold in SA as the Global Value fund).

Coronation has seen a transition at Capital Plus from the original fund manager Louis Stassen to Charles de Kock. De Kock has a reassuringly conservative approach to investment management and has proved to be well suited to the dual mandate of the fund, which combines growth with capital preservation. Coronation has recently removed performance fees from the fund in reaction to client demand.

Foord Conservative is a slightly misleading name, as “conservative” is usually used in the low-equity market. But founder Dave Foord believes this is the most conservative fund that is appropriate for long-term investment. Ironically, though he manages the Nedgroup Stable fund, he does not consider this to be the right investment for the long term.

Foord is not a named portfolio manager on the Conservative fund, which is run by Daryll Owen and Dane Schrauwen. In fact, more responsibility is being handed over to the team as Foord spends more time with the global equity team in Singapore and on the ocean waves in his yacht.

When Nedgroup Investments Opportunity Fund was started in 2011 it was a further extension of the relationship between Abax and Nedgroup. Abax also manages the Rainmaker and Entrepreneur funds for Nedgroup, and Opportunity gave them the chance to show off their asset allocation skills. Fund manager Omri Thomas helped build a culture of absolute returns and capital preservation at Sanlam Investment Management and has achieved a 14,5% annual return since inception, compared with 10.9% from the benchmark of inflation plus 5%.

Sasfin MET Balanced has less than R200m under management, but it is small enough to take stakes in small caps or small lines of credit, and they can make a difference.

Medium-equity funds provide a good trade-off between capital growth and capital security