Diverse asset allocation styles
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