Your portfolio is not a solid guarantee

Balanced funds or so-called multi-asset funds, are a combination of bonds, money market instruments, equities and real estate in a single fund.

Multi-asset funds are considered to be well-diversified across asset classes, offering income generation and capital appreciation, depending on the balance of income and growth asset classes.

Typically, the fund manager determines this balance based on the objective of the fund. But the Association for Savings and Investment South Africa (Asisa) offers some guidance in its classification system.

Multi-asset funds that aim to provide capital growth over the long term with low short-term risk are classified as multi-asset low equity funds.

They can have a maximum equity exposure of 40%, maximum property exposure of 25% and a maximum allocation of 45% to offshore assets, which increased to 30% in February 2022.

But does easy access to a well-diversified portfolio through a multi-asset low fund translate to consistent performance?

To answer this, we looked at the dispersion of net of fee returns for all the funds in the (Asisa) multi-asset low equity category over the last 10 years.

The results show that the dispersion of returns was wide for each calendar year and that it ranged between 9.5% in 2017 and 31.1% in 2021.

The worst year for local bonds was 2015, which returned -3.9% when then finance minister Nhlanhla Nene was dismissed and replaced with a politically motivated individual, a move that sent market sentiment reeling.

The rand weakened by 34% as a result and funds with more offshore relative to local exposure outperformed.

Within local equities, funds with exposure to the largest shares on the JSE – and those that avoided resource shares, which were down 37% – fared better.

What is clear from this analysis is that offshore assets have had a material impact on the dispersion of returns, an asset allocation call.

Another factor that could determine a fund’s performance is duration or interest rate risk.

What all this tells us is that having access to a well-diversified portfolio is not enough to guarantee consistent performance.