Stable in name and by nature
It proved to be a troubling start to the year for lowequity multi-asset funds, which are often simply known as stable funds. And Morningstar subscribers will know them as cautious allocation funds.
There was a shock R3bn outflow from the category in the March quarter. And it is understandable. The promise from these funds — though of course none offers a guarantee — is that you can get most of the stability of a money market or income fund from them. Well-constructed stable funds have not experienced more than a 3% to 4% short-term loss, and if you hold on for 12 months there is almost no chance of loss.
But the other implicit promise is that investors will participate in some solid returns from the stock market. These funds can have a 40% exposure to equities as well as a 25% allocation to international assets. When markets are strong and interest rates are high stable funds seem like an ideal mix of stability and high returns. Their low-volatility character adds to their appeal. It is no accident that the unit trust marketers choose soothing names such as “defensive”, “cautious”, “absolute return” and even “guarded”.
There are 215 funds in the Morningstar database for this category, which has R233bn under management. This represents more than 10% of the industry. The funds are a useful investment for people approaching retirement or during retirement, much more likely to preserve the real value of capital than cash or fixed income funds.
Stable funds are living up to their name but not up to the promise of steady growth. Even the top performers have struggled to produce a 3% to 4% return over the past year. Yet it wasn’t so long ago that these funds frequently did better than high equity funds.
Choosing a stable fund can be confusing. Some of the funds offered by financial advisers, such as NFB Cautious, are strong contenders, and others, from designated fund managers such Analytics Cautious, also have a strong reputation.
But unless you have an adviser tied in to their distribution network, you are likely to end up in one of the off-theshelf products. The two dominant funds in the sector are Allan Gray Stable Fund and Coronation Balanced Defensive, which are both featured. Nobody knows how they hit on the 40% limit to equities, but it is now the official ceiling imposed by the Association for Savings and Investments SA on the low equity category.
It took several years for any serious competition to the fund, but the most credible turned out to be Coronation Balanced Defensive. At the very least its fund manager, Charles de Kock, looks the part of someone you can trust with your money. After all, his father was governor of the Reserve Bank.
The other pretender, which has not got the attention many expected, is Investec Cautious Managed, run by Investec’s socalled “quality” team of Sumesh Chetty and Clyde Rossouw.
It is confusing trying to trawl through the fund ranges of life companies such as Old Mutual, Sanlam and Stanlib, which have anything from six to 18 funds in this category. Rather find quality in niches. The 27four Stable Fund of Funds has a cupboard full of trophies — which can’t just be good luck. It has been a pioneer supporter of some midsized managers, such as Bateleur and Visio, which has worked out well for clients.
Sasfin has been neglected for too long by the public in spite of some excellent performance. Investors in the Sasfin Stable Fund will have the chance to get in at the ground floor as Errol Shear moves in. He is one of the most experienced fund managers in SA, with an approach of value tempered with scepticism.
And as a bit of an outlier, we will be looking at the Anchor Diversified Stable Fund. Call it Anchor Life — about half the fund is in Anchor products, the rest in a blend of external active and index funds.
If Anchor is too racy for you, then get some comfort that the funds are not picked by anyone in the Anchor hierarchy but by David Bacher from Corion, a hard-core fund of funds man from his days at Investment Solutions, Caveo and Brait.
When markets are strong and interest rates are high stable funds seem like an ideal mix of stability and high returns. Their low-volatility character adds to their appeal
The fund has won multiple awards from Morningstar and from the Raging Bulls promoters. Though it is a fund of funds, its total expense ratio of 1,2% is below those of many single managers.
Fund manager Nadir Thokan says the primary aims of the portfolio are capital protection and income generation.
The firm has been proactive at promoting developing managers, black and white. It encouraged Kevin Williams at Bateleur to set up a long-only equity fund. He is one of the key equity managers in the fund alongside Kagiso, Visio (through the BCI General Equity Fund) and the Sanlam breakaway Denker, which runs a version of the Sanlam Value fund in the 27four line-up.
Thokan says larger firms, with greater access to issuance and economies of scale , are often more appropriate as bond managers. Coronation is the major bond and cash manager, along with the asset-allocating Nedgroup Flexible Income Fund.
To get a good spread of managers, global funds are pooled into the 27four Global Equity Fund of Funds. Thokan says this has a value bias, with holdings such as Vulcan Value, Brandes Global Equities and the Acadian Global Managed Volatility Fund, a quants-based fund. Thokan says Lazard Global Infrastructure Fund is also a value play, given the low prices of many shares in the sector.
To counteract the value bias, there are investments as well with managers who follow a quality approach. There is the Morgan Stanley Global Quality Fund, and outside the fund of funds there is a direct holding in the Investec Global Franchise Fund. It also invests with Ardevora, a quirky London-based boutique which has a Momentum bias. Offshore equity makes up 18% of the fund and 20% are in SA equities. About 9% of the assets are in local and global property assets; Sesfikile runs the local ones, Franklin Templeton the global.
Thokan says global property has been attractive, as real estate investment trusts have often traded on 3% yield spread against bonds. The Stable fund is sold to institutional clients as the inflation plus 3% fund, the middle of the road.
The Balanced fund is inflation plus 5% while the High Equity strategy of inflation plus 7% is not available as a unit trust. 27four Stable can be bought in a tax-free savings account wrapper. It qualifies, as it is has no underlying performance fees.
With R44bn under management this is still the giant of the sector, though over time the rise of the Nedgroup Investments and Coronation funds have given it some competition. Yet over the past three years it has grown from R30bn.
Allan Gray invented this category when low risk meant an income or a bond fund. Since inception in July 2000 there has been a 12.6% return, compared with 9.1% for the benchmark. Cumulatively that is almost double the return. The Allan Gray philosophy hasn’t changed, though with so much imitation it doesn’t seem so unusual anymore. It seeks to buy shares when they can be had at a significant discount due to their dismal short-term prospects.
Fund manager Mark Dunley-Owen says that, unlike the equity fund, the stable fund does not have to keep to its maximum equity weighting at all times. It has just a 34% net exposure to equities at present. Its international exposure is less than 11% on a net basis with a further 10% hedged. This is because the allocation is divided between the Orbis Global Balanced Fund, a traditional multi-asset portfolio, and Orbis Optimal, which hedges out the bulk of the market risk. Dunley-Owen says the foreign portion of the fund was reduced from 27% to 25%, primarily to meet the requirement of Regulation 28 of the Pension Fund Act.
Domestically, Dunley-Owen says, many of the shares will be the same as those in the equity and balanced funds. This is the case with the top six shares, though the order varies slightly: Sasol, British American Tobacco, Standard Bank, Old Mutual, Remgro and Naspers. But further down the table there is a bias towards value shares with the prospect of good dividends.
Barclays Africa and Liberty are in the Stable fund top 10, Investec and Rand Merchant Investment are absent. DunleyOwen says he is not adding to the Naspers position but he finds the underlying assets of Remgro attractive.
The bond and cash exposure in the fund is almost entirely focused on SA and there is about a 5% exposure to foreign bonds and cash, of which almost 2% is in Africa.
The fund is a hybrid fund of funds designed for investors who want exposure to the capabilities of Anchor Capital, a listed boutique fund manager, but also want it blended and diversified with other offerings.
To ensure a fair outcome Anchor does not do the blending; instead, it has hired David Bacher from Corion. This is the old Brait fund of hedge funds business. Bacher previously worked for Investment Solutions and Caveo, so picking funds is in the blood. He is the son of former cricket tsar Ali Bacher, and he also has a competitive streak. He is even competing against himself, as there is a Corion-branded fund in the same category.
There are two main exposures to Anchor. One, via Anchor Flexible Income, makes up almost a third of the fund, and a further 8% is in the Anchor BCI Equity Fund. Bacher says to smooth out returns, given the high tracking error of the Anchor funds, there is a substantial exposure to index funds, with 9% in the GinsGlobal Global Equity Fund, run by former Barclays SA boss Anthony Ginsberg, as well as Stanlib’s Alsi 40 tracker (5%) and its All Bond Tracker (4%). It also has a token position in the iShares Emerging Markets fund.
But there are also active funds that complement the Anchor approach. Almost 19% of the fund is held in the Nedgroup Flexible Income Fund, an R11.5bn fund run by Rashaad Tayob at Abax. It is conservative right now, with a similar duration to a money market fund. Bacher also invests in the Sanlam Select Bond Plus Fund (8%), which is not run by Sanlam’s in-house team but by Matrix Fund Managers.