Passive funds on up

GOOD RETURN: COMPELLING OFFERS, LOW MANAGEMENT FEES If passive balanced funds get their asset allocation correct, out-performance can result.

SA unit trust investors have shown a clear preference for multi-asset, or balanced funds in recent years. The Association for Savings and Investment South Africa’s (Asisa’s) latests statistics shows just under half of all the assets in SA collective investment schemes are now in these kinds of vehicles.

This has encouraged many asset managers to launch new funds in this space.

Over the last decade, the number of SA multi-asset funds has more than doubled from 320 to 756.

The vast majority of these are actively managed unit trusts, but in recent years a number of managers have brought out balanced funds using index tracking for all or the majority of their asset class exposure.

They’re able to charge annual management fees as low as 0.34%. Through good asset allocation they’re also able to offer compelling performance.

Investor choice

It’s therefore been interesting that SA’s passive balanced funds have differentiated from each other in two ways: they all have their own strategic/base asset allocation, which they believe is optimal; and some funds keep that asset allocation entirely static while others might make adjustments from time to time. A few even supplement their passive exposure with some active stock-picking.

The result is the performance between these funds can differ quite widely. In the returns of some of these funds for the year to date, two appear in the top 10 among SA multi-asset high-equity funds, but others appear much further down the list.

The Prescient Balanced Fund is the third best-performing fund in the category over this period. It’s also over 6% ahead of the Gryphon Prudential Fund of Funds.

Although this short-term performance shouldn’t be taken as an indication of which funds are better than others, it shows the range of performance that can be experienced in different passive balanced funds. Investors aren’t therefore just “buying the market” as they might be with a single asset class index tracker. They’re buying a particular view of the market, so they must make more informed choices.

It’s important to understand which underlying indices the funds use, what their asset allocation is, whether there’s also an active component to the portfolio, and if the asset allocation is fixed or changes over time. Only then can investors be comfortable with a strategy.