Balanced funds in doldrums

STRUGGLE: ‘ASSETS THAT NORMALLY DO THE HEAVY LIFTING OVER A PERIOD ARE OVERPRICED”

Ensure there are various pockets in your portfolio that can deliver returns in different market conditions: Paul Bosman. Moneyweb

Local balanced funds – typically used to save for retirement – have generally had a tough two years and underperformed benchmarks. For retired investors, who may be drawing from underperforming balanced fund strategies, capital erosion is a worry – particularly in the first few years. If 4% income is drawn a year, with 5% inflation and 2% fees, the fund must deliver at least 11% or the investor will draw capital.

PSG Asset Management’s Paul Bosman likened unit trust performance to a vessel that must be propelled across the ocean.

“You’ve fitted it with motors but you actually can’t control which motor fires when. Your job is to make sure that there are enough motors … and in a working condition. If they all fire at the same time – that normally doesn’t happen – then your numbers look very good in the short term.

“You can’t control the timing of performance. You have got to make sure you have got various pockets in your portfolio that can deliver returns in different market conditions.”

“I think that headwind won’t be there going forward,” said Abax Investments’ Omri Thomas, adding that the underperformance of some balanced fund strategies must be seen in context. Most balanced funds had 25% of assets offshore and since the rand strengthened significantly, this was a big drag on performance.

SA investors are in the fortunate position that real returns from bonds – although they’ve rallied – and cash are still fairly high. But local equities have split into three stories: Naspers, rand hedges and domestic stocks. “Only recently the domestic stocks have really run hard and we still think there is some value left in [them]. You can still get a proper equity risk premium from the SA market.” Absa Balanced Fund’s Kurt Benn argued the domestic equity market is quite expensive – led by a number of re-ratings. While Naspers is a big driver, many middle- and upper-income South Africans’ disposable income has gone backwards over four years due to tax hikes. Although GDP growth is seen improving over the next few years, it needs the ANC to ensure a stable policy environment.

“There are risks out there and we think the prices that you pay right now for domestic assets are too high given those risks.”

Benn said globally, valuations are stretched. Also, investors face a quantitative tightening environment led by the US raising rates this year and next year. “That never ends happily for markets where the P/E ratios are in the stratosphere. Our view is that we go into capital protection mode. We are much more conservative looking forward. I think from a [CPI] +5 perspective … we are going to struggle because the assets that normally do the heavy lifting for you over a three- or five-year horizon, are overpriced.”

“It will take time but …I think we are going to see an acceleration in earnings growth from domestic business,” Thomas argued.