Di­verse as­set al­lo­ca­tion styles

Financial Mail - Investors Monthly - - Analysis: Unit Trusts - STEPHEN CRANSTON

n the risk con­tin­uum, multi-as­set in­come funds sit just be­low low-eq­uity funds. They have more lat­i­tude than the fixed-in­come funds, whether bond or vari­able term.

These funds are true as­set al­lo­ca­tion funds, and have the scope even to in­vest 10% of fund as­sets in eq­uity, though this al­lo­ca­tion is more typ­i­cally used for pref­er­ence shares than for or­di­nary eq­uity.

The main op­por­tu­nity to bring cap­i­tal growth into these funds is through prop­erty.

This can ac­count for 25% of the port­fo­lio, though it is of­ten lim­ited to 2% or 3%, with the ex­cep­tion of a few cot­tage busi­nesses such as El­e­ment.

David Knee, man­ager of the Pru­den­tial En­hanced In­come Fund, de­scribes the sec­tor as a “smor­gas­bord” of dif­fer­ent funds. It is made up pre­dom­i­nantly of funds that used to be housed in the catch-all fixed-in­come var­ied spe­cial­ist cat­e­gory and even a few from the old tar­geted- and ab­so­lute-re­turn cat­e­gory. They cer­tainly have far more lee­way than the tra­di­tional in­come funds (which had a max­i­mum du­ra­tion of two years and had to stick to bonds and cash). This is con­fus­ing, as most have the word “in­come” in their name.

Be­fore in­vest­ing in one of these funds it is im­por­tant to check the way it is run. It could end up be­ing quite an ag­gres­sive fund if it in­vested the full per­mit­ted 25% in prop­erty, 25% off­shore and de­lib­er­ately chose high­est-yield in­stru­ments.

But you can be sure that if the fund is SIM Ac­tive In­come — run by Philip Lieben­berg, who has no as­sets off­shore and only lim­ited ex­po­sure to prop­erty — you will get a rel­a­tively smooth ride.

Most of the funds in this sec­tor, how­ever, were ex­posed to African Bank pa­per in the search for high yield. But in the end a fi­nan­cial ad­viser would be ir­re­spon­si­ble to put his client in a fund with riskier, racier as­sets

Ijust to add 1% or so to the an­nual yield. But, of course, no­body wants to in­vest with a fund man­ager who is asleep at the wheel and doesn’t look out for op­por­tu­ni­ties to add re­turn at the ap­pro­pri­ate risk.

The five funds we have cho­sen have di­verse styles. El­e­ment Spe­cial­ist In­come, with lit­tle more than R100m un­der man­age­ment, pulls all the levers, with high al­lo­ca­tion to prop­erty and pref shares. In con­trast, the larger Corona­tion Strate­gic In­come Fund has more muted al­lo­ca­tions to these as­set classes, though it has a big­ger off­shore slice.

Gen­er­ally, fixed-in­come funds have much greater capacity than eq­uity funds. Even at R22bn un­der man­age­ment, Corona­tion Strate­gic In­come still has plenty of scope to im­ple­ment good ideas as it trawls deep cash and bond mar­kets.

Fixed in­come is still rel­a­tively im­mune to in­dex­a­tion — bond and cash in­dex funds have not gained trac­tion.

And most funds are com­fort­ably ahead of their bench­marks. Since in­cep­tion Strate­gic In­come has given a 10,7% an­nu­alised re­turn com­pared with 8.7% from its bench­mark of 110% of Stefi (the money mar­ket in­dex).

Pru­den­tial En­hanced In­come is 1,5% ahead of bench­mark since in­cep­tion in 2009. Pru­den­tial has the most so­phis­ti­cated port­fo­lio con­struc­tion of these five funds, a con­se­quence of Knee’s long years of ex­pe­ri­ence in the Lon­don mar­kets. But it is also more ex­posed to the bond yield cy­cle, and took a 2% knock in De­cem­ber dur­ing the Nenegate shenani­gans.

The Stan­lib Flex­i­ble In­come fund also looks like a good choice, though it tends to be over­shad­owed in its sales lit­er­a­ture by the more ex­cit­ing Stan­lib Ag­gres­sive In­come Fund, which can take a much big­ger slug of prop­erty.

Per­haps the two funds will be merged one day. The Flex­i­ble fund has had its poor years, and re­turned just 0,3% for the year at the time of the global fi­nan­cial cri­sis, but the same team has been in place and should have learned from the ex­pe­ri­ence.

In­vestors who be­lieve their port­fo­lios are weighted too heav­ily to­wards eq­uity should con­sider in­vest­ing in a multi-as­set in­come fund, which is a one-stop en­try point into the var­ied world of fixed in­come. Just re­mem­ber that there is the risk of cap­i­tal loss — it is not an al­ter­na­tive to a money mar­ket fund.

But multi-as­set in­come funds will give en­hanced re­turns over the medium to long term.

Gen­er­ally, fixed-in­come funds have greater capacity than eq­uity funds. Even at R22bn un­der man­age­ment, Corona­tion Strate­gic In­come still has scope to im­ple­ment good ideas as it trawls deep cash and bond mar­kets

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