As the year draws to a close, many in­vestors will be out meet­ing with their fi­nan­cial ad­vis­ers to con­sider how their sav­ings should be in­vested. fin­week spoke to the man­agers of six of the coun­try’s top-per­form­ing bal­anced funds to gauge their views on So

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the slug­gish econ­omy, ex­pen­sive stock mar­ket, loom­ing rat­ings down­grade and pos­si­ble in­ter­est rate in­crease all com­bined make for a tough cli­mate for in­vestors seek­ing re­turns in SA.

Re­gard­less, many re­tirees, or those sav­ing up for their golden years, will con­tinue to opt to put a l arge por­tion of their nest eggs in riskier unit trusts, hop­ing for higher re­turns. The riski­est unit trusts al­lowed by law are bal­anced funds.

Bal­anced-fund man­agers are walk­ing a tightrope to beat in­fla­tion and de­liver on a dual man­date to in­vestors, namely that of grow­ing the un­der­ly­ing cap­i­tal while de­liv­er­ing in­fla­tion-beat­ing re­turns. With the Pen­sion Funds Act lim­it­ing bal­anced f unds’ off­shore ex­po­sure t o 25% of t heir un­der­ly­ing cap­i­tal, al­most all man­agers have al­lo­cated the max­i­mum amount they are al­lowed to for­eign as­sets.

The weak­en­ing rand has proved an un­likely tail­wind for many bal­anced funds this year and acted as a kind of hedge.

The bal­anced-fund man­agers fea­tured i n this is­sue were good per­form­ers on Morn­ingstar Re­search’s list over the past 12 months.

1. Rezco Man­aged Plus


One-year re­turn (Fund/In­fla­tion): 15.7%/4.6%

Three-year an­nu­alised re­turn (Fund/In­fla­tion): 18.6%/5.73%

FIND­ING VALUE SHARES i s prov­ing dif­fi­cult for Rob Span­jaard, a fund man­ager at Rezco As­set Man­age­ment.

“Value is re­ally hard to find,” he says. “Shares are re­ally ex­pen­sive.”

That is one of the rea­sons why the Rezco Man­aged Plus Fund is hold­ing rel­a­tively more cash than its peers, ac­cord­ing to him. Wait­ing for the right i nvest­ment op­por­tu­ni­ties to come along would be re­ward­ing, he says.

“There is value in pa­tience,” Span­jaard says. “Pa­tience will be re­warded; not over­pay.”

The fund favours lo­cal fi­nan­cial and listed prop­erty stocks, which com­prise al­most half of i ts eq­uity i nvest­ments. The largest fi­nan­cial hold­ing is med­i­cal in­surer Dis­cov­ery. The com­pany’s Chi­nese op­er­a­tions still boast value, Span­jaard says.

“There is good po­ten­tial up­side, which you are not re­ally pay­ing much for,” ac­cord­ing to him.

An­other stock de­liv­er­ing value to the fund is multi­na­tional pack­ag­ing gi­ant Mondi plc. This com­pany con­tin­ues to pro­duce “great num­bers” and is well man­aged, ac­cord­ing to Span­jaard.

In terms of in­ter­na­tional in­vest­ment op­por­tu­ni­ties, the fund is pos­i­tive on the US mar­ket and is start­ing to see value op­por­tu­ni­ties com­ing through from Europe – a mar­ket, which is slowly re­cov­er­ing from its sov­er­eign debt cri­sis, Span­jaard says.

“We find Euro­pean com­pa­nies that have an ex­port com­po­nent ben­e­fit from the euro be­ing a fairly weak cur­rency,” he ex­plains.

Span­jaard’s tip to in­vestors who are con­tem­plat­ing re­bal­anc­ing their port­fo­lios and con­sid­er­ing bal­anced funds is that they should find funds with a “good track record” and that have done well through the bear mar­ket, or when the stock mar­ket fell.

In ad­di­tion, in­vestors should think about di­ver­si­fy­ing their bal­anced funds so as to have dif­fer­ent man­agers with dif­fer­ent man­age­ment styles, he says.

2. Truf­fle Bal­anced Fund


One-year re­turn (Fund/In­fla­tion): 18.42%/4.6%

Three-year an­nu­alised re­turn (Fund/In­fla­tion): 18.72%/5.73%


BAL­ANCED FUND has a large ex­po­sure to lo­cal fi­nan­cial and prop­erty stocks, which it views as de­fen­sive in the cur­rent eco­nomic con­di­tions, ac­cord­ing to Charles Booth, one of the fund’s man­agers.

“Value is not as easy to find as a year or two ago,” he says. “We’ve got a lot of ex­po­sure to fi­nan­cials, which we think is de­fen­sive. That in­cludes prop­erty.”

The fund also has a large ex­po­sure to Bri­tish Amer­i­can To­bacco, where there is a “very high de­gree of cer­tainty” of earn­ings, Booth says.

His tip for in­vestors choos­ing a bal­anced fund is to be com­fort­able that the man­ager would en­sure “good long-term re­turns”.

In the case of a bal­anced fund, the man­ager’s ob­jec­tives are more com­pli­cated than is the case with a straight eq­uity fund, says Booth. On the one hand the ob­jec­tive is to gen­er­ate a good re­turn, while on the other, the man­ager tries to pre­serve cap­i­tal, he ex­plains.

3. Dis­cov­ery Bal­anced Fund


One-year re­turn (Fund/In­fla­tion): 12.88%/4.6%

Three-year an­nu­alised re­turn (Fund/In­fla­tion): 15.79%/5.73%

IN­VEST­MENT OP­POR­TU­NI­TIES IN the lo­cal eq­uity mar­ket are be­com­ing less ob­vi­ous, ac­cord­ing to Chris Fre­und, a fund man­ager at In­vestec As­set Man­age­ment who over­sees the Dis­cov­ery Bal­anced Fund.

The fund’s above-in­fla­tion re­turns for the past 12 months can be at­trib­uted to the very strong per­for­mance of the South African stocks held in its port­fo­lio and by good re­turns on the for­eign as­sets of the fund, ac­cord­ing to Fre­und.

One of the stocks that boosted the fund was Stein­hoff In­ter­na­tional, in which the fund had an over­weight po­si­tion, ac­cord­ing to him. An­other stock that boosted the fund’s re­turns was Mondi, which Fre­und says the fund has held for some time now.

“We think Mondi has an ex­tremely high- qual­ity man­age­ment team,” he says.

The fund also had a big­ger ex­po­sure to Naspers* than many other funds, ac­cord­ing to Fre­und. He dis­missed the idea that the stock was trad­ing at too high a val­u­a­tion and says that, when one analy­ses the com­pany, it has to be split into its hold­ing in Ten­cent and its other in­ter­net-based busi­nesses as well as its DStv as­sets.

“If you split it up, in fact it was rea­son­ably priced given how well Ten­cent was grow­ing,” Fre­und says, adding that the fund likes the team that is man­ag­ing Ten­cent. Naspers holds a 34% stake in Ten­cent, a Chi­nese in­ter­net com­pany.

Go­ing for­ward, Fre­und ex­pects Naspers’s non-Ten­cent busi­ness units, in­clud­ing the elec­tronic clas­si­fied busi­nesses, to do “very well” over the next cou­ple of years.

He also reck­ons Vo­da­com would de­liver good re­turns in due course as mo­bile phone tar­iffs in SA halt their slide and Cell C aban­dons its price pres­sures on com­peti­tors. Aside from eas­ing com­peti­tor pres­sures, mo­bile data is likely to con­tinue to grow at a very rapid pace over the next cou­ple of years, ac­cord­ing to Fre­und.

Fre­und’s tip for in­vestors is that they should put their money into bal­anced funds. Over the next cou­ple of years, the level of re­turns be­tween dif­fer­ent as­set classes will prob­a­bly not be that big, but he says that the big dif­fer­ence will come from the spe­cific se­cu­ri­ties you own. He ex­pects the aver­age re­turns on bal­anced funds to be in the re­gion of be­tween 9% and 10%. He is, how­ever, con­fi­dent that they will be able to de­liver even higher real re­turns for the Dis­cov­ery Bal­anced fund.

4. Au­tus BCI Bal­anced Fund


One-year re­turn (Fund/In­fla­tion): 16.48%/ 4.6% 18.56%/Three-year an­nu­alised re­turn (Fund/In­fla­tion): 5.73%

AU­TUS FUND MAN­AGERS’ BAL­ANCED FUND is see­ing more value in stock picks off­shore than lo­cally, says Niël Hougaard, man­ager of the fund.

“It is no se­cret that our fund is un­der­weight in eq­ui­ties,” he says. “If you aim to add value to a port­fo­lio, it comes down to which com­pa­nies you pick to in­clude in your fund.”

In this re­gard, Hougaard still sees op­por­tu­ni­ties in cer­tain lo­cal eq­ui­ties such as the PSG-linked com­pa­nies, in­clud­ing Curro Hold­ings, Zeder In­vest­ments and Capitec. In ad­di­tion, he is op­ti­mistic about the earn­ings po­ten­tial of lo­cal com­pa­nies with a for­eign in­come stream, such as Stein­hoff In­ter­na­tional and Naspers. Other op­por­tu­ni­ties, how­ever, are lim­ited due to the val­u­a­tion of lo­cal stocks.

“The JSE’s All Share I ndex trad­ing at a price-to-earn­ings ra­tio of 26.8 wor­ries me,” Hougaard says. “Util­is­ing your full off­shore al­lo­ca­tion is def­i­nitely a bet­ter op­tion.”

With re­gards to in­vestors hav­ing to de­cide where to move their re­tire­ment money to, Hougaard’s tip is to look for those funds that have yielded in­fla­tion-beat­ing re­turns over the long term.

“The bal­anced fund must beat in­fla­tion and yield real growth in ad­di­tion to pro­tect­ing the investor’s pur­chas­ing power over time,” he says.

In ad­di­tion, he says in­vestors should keep abreast of the changes in the mar­ket and in­dus­try. Larger fund man­agers may lack the nim­ble­ness as­so­ci­ated with bou­tique-like out­fits, which can move swiftly in and out of po­si­tions to op­ti­mise re­turns growth, he ex­plains.

“It is, how­ever, very im­por­tant that the investor knows what is hap­pen­ing in the mar­ket,” he adds.

5. In­vestec Man­aged Fund


One-year re­turn (Fund/In­fla­tion): 14%/4.6%

Three-year an­nu­alised re­turn (Fund/In­fla­tion): 14.8%/5.73%


FUND holds more than a quar­ter of its un­der­ly­ing as­sets in cash and money-mar­ket in­stru­ments as Gaile Daniel, man­ager of the fund, doesn’t see many cheap stocks in the lo­cal mar­ket.

“It’s a bear­ish state­ment to be in cash,” she says, adding that cash has done bet­ter than banks. “I strug­gle to be bullish on bonds.”

With the JSE trad­ing at ex­pen­sive val­u­a­tions and the lo­cal econ­omy buck­ling un­der multi-year low com­mod­ity prices, in­creas­ing num­bers of com­pa­nies are miss­ing earn­ings tar­gets.

A f unc­tion of t he weak e c on­omy i s t he bank­ing sec­tor, ac­cord­ing to her. The fund is “l i ght” i n banks, which she de­scribes as be­ing a con­trar­ian po­si­tion to the rest of the mar­ket. “The banks have done very well un­til the start of this year,” she says. “The re­vi­sions [to earn­ings] are slightly neg­a­tive.”

In ad­di­tion, a lot of the lo­cal stocks have ex­po­sure to the rest of Africa, Daniel says. With many re­sourcede­pen­dent emerg­ing-mar­ket economies suf­fer­ing the same fate as SA, growth prospects for th­ese coun­tries are un­cer­tain.

“For a long time we’ve been con­cerned about the risk in Africa. The African mar­kets are ex­cep­tion­ally priced out with a huge liq­uid­ity flow be­hind them,” she says.

Fol­low­ing the un­prece­dented low in­ter­est-rate en­vi­ron­ment the world ex­pe­ri­enced fol­low­ing the re­ces­sion in 2008/09, many in­vestors in de­vel­oped mar­kets poured money into emerg­ing mar­kets, in­clud­ing the rest of Africa. Boosted by high com­mod­ity prices, record-set­ting eco­nomic growth lured off­shore as­set man­agers to the con­ti­nent.

“It cre­ated this wall of money that mis­priced every­thing,” Daniel says. “That story is un­wind­ing.”

She ad­vises in­vestors to con­sider in­vest­ing in one or two good bal­anced funds, which is less risky than buy­ing prop­erty to rent out, where you run the risk of ten­ants de­fault­ing on rental pay­ments. In ad­di­tion, she says that an investor should look for funds where the off­shore al­lo­ca­tion re­duces risk rather than in­creases it. By this, she says that in­vestors should de­ter­mine whether the off­shore al­lo­ca­tion is in­vested in emerg­ing-mar­ket as­sets or not.

6. Con­tego MET Wealth Cre­ator Fund of Funds


One-year re­turn (Fund/In­fla­tion): 16.33%/4.6% 14.95%/5.73%Three-year an­nu­alised re­turn (Fund/In­fla­tion):


OF FUNDS in­vests in un­der­ly­ing funds not lim­ited to Con­tego As­set Man­age­ment’s of­fer­ing. The fund isn’t us­ing its full for­eign al­lo­ca­tion as it is bullish on the rand.

“Nor­mally we would like as much as pos­si­ble of the fund in off­shore,” says Kobus Louw, man­ager of the fund. This “is to pro­tect against weak­ness in the rand and un­cer­tainty in South Africa”.

With the rand “hov­er­ing at around R14 for a dol­lar”, most econ­o­mists are in con­sen­sus that the cur­rency is weak, ac­cord­ing to him. “It’s not the op­por­tune time to take money off­shore per se,” he says. Look­ing at the mar­kets, there are “huge global risks” in­clud­ing the US Fed con­sid­er­ing rais­ing in­ter­est rates and set­ting the di­rec­tion for most other coun­tries, the Chi­nese eco­nomic cooldown, the mi­grant cri­sis in Europe, war in the Mid­dle East and Rus­sia be­ing in­tent on world dom­i­nance, ac­cord­ing to him.

Lo­cal risks in­clude the eco­nomic slow­down, which could be an ig­nit­ing fac­tor of stu­dent un­rests, and poor ser­vice de­liv­ery, Louw ex­plains.

“I f you l ook to the hori­zon, every­thing l ooks un­cer­tain,” he says. “It’s a dif­fi­cult time to in­vest. So where do you put your money? You have to put it some­where as you can’t keep it in cash.”

Over the longer term eq­ui­ties and prop­erty would out­per­form in­fla­tion, Louw says, even as the lo­cal eq­uity mar­ket looks ex­pen­sive at the mo­ment.

With the global and lo­cal econ­omy “very frag­ile” any sud­den shock would prob­a­bly hit stock mar­kets, he says.

When choos­ing a bal­anced fund to in­vest your re­tire­ment money, an investor must con­sider that the fund should de­liver re­turns of be­tween four and five per­cent­age points above in­fla­tion, says Louw, as re­tirees would have to live off th­ese re­turns.

An­other tip for in­vestors is for them to en­sure that a good por­tion of the bal­anced fund is in­vested off­shore to mit­i­gate against South African coun­try risk, he says.

Charles Booth Fund man­ager: Truf­fle Bal­anced Fund

Rob Span­jaard Fund man­ager: Rezco Man­aged Plus

Chris Fre­und Fund man­ager:

Dis­cov­ery Bal­anced Fund

Niël Hougaard Fund man­ager:

Au­tus BCI Bal­anced Fund

Kobus Louw Fund man­ager: Con­tego MET Wealth Cre­ator

Fund of Funds

Gaile Daniel Fund man­ager:

In­vestec Man­aged Fund

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