Allan Gray delivers
OTHER MULTI-ASSET, LOW-EQUITY FUNDS ARE FLOUNDERING Investors could have taken on less risk and received higher returns.
In the low-return environment of the last few years, one of the biggest casualties has been local multi-asset (MA), low-equity funds. These unit trusts, designed to deliver steady, inflation-beating returns, have largely struggled to deliver.
Due to the JSE’s weak performance, the returns boost they’d generally get from their equity allocations (they can have up to 40% in stocks) hasn’t been there. So, very few have beaten a consumer price index (CPI) plus 3% benchmark over the last five years (this category’s generally-accepted standard).
This has been tough for investors to accept, since the top bond funds and multi-asset income funds have outperformed most of this category for the past three years. A harsh judgment would be that MA low-equity fund managers have let their clients down by hoping for equity returns that haven’t materialised. Had they allocated more to fixed-income assets, their performance may have been better.
However, these funds’ mandate is generally to maintain that exposure to the stock market so when better returns are available, they don’t miss them – not to try to time when that might happen. Nevertheless, investors are disillusioned. A recent Association for Savings and Investment South Africa analysis shows significant net outflows from most of the largest local MA low-equity funds. Investors have preferred MA income funds, where recent returns have been better.
Table 1 indicates the only five funds, out of 109 in this category with three-year track records, that produced returns of better than CPI plus 3% (8.36%). The Allan Gray Stable Fund, the largest fund in this category, tops
Allan Gray Stable Fund is tops in category
the list. It’s the only one of the big multi-asset low-equity funds that saw positive net inflows over the last three years. It is also the only one among MA low-equity funds to beat the CPI plus 3% benchmark over both three and five years. The portfolio has also been at almost full weight in equities. It currently has a net equity exposure of 38.7%, with 25.5% of its funds held on the JSE. This is higher than its long-term average.
The Element Real Income Fund carries a very similar weighting to equities at 38.8%. Most of this is also local, which shows it has still been possible to find the kinds of returns investors expect on the JSE. The Sanlam Select Defensive Balanced Fund has turned to the bond market for its returns. Nearly half of the portfolio is invested in local bonds. Its equity exposure is just 25.1%.
Managers are using different strategies, but still have meaningful exposure to the stock market.