Make sure you like the rules

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

I n the spec­trum of mul­ti­as­set funds flex­i­ble funds are of­ten con­sid­ered the most risky. Yet, para­dox­i­cally, they pro­vide the tools that al­low the fund man­ager to run them in a highly riska­verse way.

There are three main types of flex­i­ble funds, so the in­vestor must be sure to be com­fort­able with the rules of each cat­e­gory. The most flex­i­ble are in the world­wide cat­e­gory, as they can not only go from zero to 100% eq­uity but also move be­tween for­eign and SA as­sets.

But many in­vestors are un­com­fort­able giv­ing so much free­dom to the fund man­ager.

A few funds in that cat­e­gory have won ac­claim in the in­dus­try, such as Fo­ord Flex­i­ble, Corona­tion Mar­ket Plus and Ned­group In­vest­ments Bra­vata.

But it is not nearly as fiercely con­tested as the SA flex­i­ble cat­e­gory. This still has gen­er­ous wig­gle room to in­vest off­shore, as 25% of as­sets may be in for­eign as­sets plus a fur­ther 5% in Africa, but there is the cer­tainty that at least 70% of as­sets are lo­cal.

The R60bn in do­mes­tic flex­i­ble funds is mod­est com­pared with the R430bn in high-eq­uity funds. But do­mes­tic eq­uity funds have al­most dou­bled the as­sets of world­wide flex­i­ble funds, which run about R36bn in client funds.

We could choose only five in this month’s In­vestors

Monthly , but other funds, by new-gen­er­a­tion man­agers, are An­chor Se­cu­ri­ties Flex­i­ble, Bateleur Flex­i­ble, Cen­taur Flex­i­ble, No­vare Flex­i­ble and Vi­sio Ac­tinio. It is not an en­tirely con­sis­tent peer group, as it in­cludes some pro­tected eq­uity funds, such as Cadiz Eq­uity Lad­der, a few flex­i­ble in­come funds that felt they did not get enough lat­i­tude in other cat­e­gories, such as Mar­riott High In­come, and the odd prop­erty fund look­ing for the abil­ity to put 50% into cash, such as Mar­riott Prop­erty Eq­uity.

And adding some grey hair to a gen­er­ally youth­ful line-up is former Martin & Co boss Win­ston Flo­quet, who has come to spe­cialise in flex­i­ble funds in his ma­ture years. His Flag­ship Flex­i­ble Value in the do­mes­tic sec­tor is quite low key. His mul­ti­ple-award win­ner in the world­wide cat­e­gory, Flag­ship World­wide Flex­i­ble, is cer­tainly one to watch.

The most cred­i­ble of the big-brand flex­i­ble funds must be Old Mu­tual Flex­i­ble. It is run by Peter Brooke, head of the multi-as­set “bou­tique” at the Big Green. It is run along­side the house’s most ag­gres­sive bal­anced port­fo­lio, Edge 28, once known as Pin­na­cle.

The five funds we have se­lected look promis­ing, though only PSG Flex­i­ble has re­ally been a strong short-term per­former. The funds are not as com­plex as you might imag­ine. In the­ory they should con­tain an infinite num­ber of mov­ing parts. But all are eq­uity cen­tric, adding most value by bot­tomup stock­pick­ing.

The other big de­ci­sion they make is to work out how much cash to put into the port­fo­lio. Even their moves into do­mes­tic bonds are highly se­lec­tive.

PSG is the first to ad­mit that its flex­i­ble op­tion is in ef­fect a di­luted eq­uity fund, which will show lower draw­downs and volatil­ity over time. PSG hit a sweet spot in its stock se­lec­tion in 2016, rais­ing it close to the top — in fact, over one year it is third af­ter Flag­ship and El­e­ment Flex­i­ble. PSG has a well­rounded, ex­pe­ri­enced team, which is also much less hide­bound by bu­reau­cracy than, say, Old Mu­tual.

PSG is prob­a­bly fur­ther ad­vanced in its life cy­cle than any of the other fund man­agers that are fea­tured. On any given day, 36One might well man­age more as­sets than PSG, though it still has quite a lim­ited prod­uct set fo­cused on eq­ui­ties. Per­haps the 36One Flex­i­ble Op­por­tu­nity Fund would fit more com­fort­ably into the ag­gres­sive bucket, rather than the flex­i­ble one. It should be seen as the best in­vest­ment view of an un­doubt­edly tal­ent- ed in­vest­ment team, headed by Cy Ja­cobs, even though it has lost a star man­ager in Jean Pierre Ver­ster, now at Fairtree.

Truf­fle has also built its rep­u­ta­tion on its flex­i­ble fund, and picks from the full menu of as­set classes more than its peers do. Its multi-as­set skills are for all to see now that it runs the high-pro­file Ned­group In­vest­ments Man­aged fund.

Lau­rium has only re­cently put its head above the para­pet. Refugees from stock­broking do not al­ways suc­ceed on the “buy side”, but Deutsche’s Mur­ray Winck­ler and Gavin Vor­w­erg cer­tainly have. It has been the best-per­form­ing flex­i­ble fund over its four-year life span.

Our fi­nal fund is Clu­casGray Fu­ture Titans. Its heart be­longs in the mid- and small-cap sec­tor but it prefers the more re­laxed rules of the flex­i­ble funds. It is quite dif­fer­ent from its peers, with shares such as Sir­ius Real Es­tate, Hu­lamin and In­ter­waste in its top hold­ings.

But it has cer­tainly had its share of sil­ver­ware, and ar­guably anybody look­ing for a mid- and small-cap fund should choose this in pref­er­ence to the fuddy-duddy funds in the small-cap sec­tor.

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