Balanced fund investor would have done better in a bank deposit

We’re told it’s time in the market that counts. If you have the time, you can take on higher investment risk, which is the only way to achieve inflation-beating returns.

But achieving those returns is not a given.

In May 2006, Mr H began putting away R300 a month in the Nedgroup Investments Managed Fund for his domestic worker. His contributions escalated by 10 percent a year, so that, by September this year, he was contributing about R780 a month. Mr H contributed a total of R61 109 to the end of September. The fund value at that point was R62 546. Subtract the one from the other, and the return over 10 years and five months works out to a mere R1 437.

The Nedgroup Investments Managed Fund is a multi-asset highequity fund. This sub-category of unit trust funds can invest across the asset classes of equities, listed property, bonds and cash, and invest up to 25 percent of the portfolio offshore. Equity exposure can be up to 75 percent of the portfolio, but it doesn’t have to be that high if the fund manager sees too much risk in equities.

Multi-asset funds have a lower risk profile than funds that invest purely in equities. Commonly known as “balanced” funds, they are the most popular form of collective investment in South Africa.

According to ProfileData, the Managed Fund returned 5.1 percent a year, on average, for the 10 years to September 30 this year, the worst of the 39 funds in the South African multi-asset high-equity sub-category with a 10-year track record. The top funds achieved average annual returns of over 12 percent, while the average fund returned about 10 percent a year. Inflation over the period averaged 5.6 percent.

The five-percent average return actually gives a very skewed picture of the Managed Fund’s performance. The fund did well in the aftermath of the 2008/9 financial crisis, with returns of 17.7 percent in 2009 and 11.3 percent in 2010. But in the 12 months from June 2014 (about the time its net asset value reached its peak) to June 2015, it lost 13.4 percent of its value, and in the subsequent 12 months, to June this year, it lost another 16.9 percent.

So if you were slowly accumulating capital by contributing monthly, as Mr H was for his domestic worker, you would not have benefited much from the fund’s good performance in the early years of the 10-year period, but you would have lost a great deal (about 30 percent) of your savings in the past two years, when its fortunes turned.

Compare this with a bank deposit that paid a solid-but-low interest rate of a constant five percent a who lost money in the fund, many of whom may also not have the time to catch up what they lost?

There are no guarantees with this type of investment. But did Nedgroup Investments create certain expectations for investors? Nedgroup outsources its funds to boutique fund managers, and it has prided itself on choosing managers that are “best of breed”. Wouldn’t investors have expected that the fund at least performed averagely well?

Another thing. RE:CM, the manager Nedgroup chose for its Managed Fund back in the early 2000s, before changing managers early this year, has a relatively extreme, or “contrarian”, investment style, known as deep-value investing. This was not your everyday balanced fund. Were investors, and even the advisers who were advising their clients to invest in it, aware of its atypical nature?

WHAT WENT WRONG

You’re in bumper-to-bumper traffic on a dual carriage way, and the vehicles in the lane next to you appear to be moving faster than those in your lane. Feeling under pressure to reach your destination, you indicate and nose your car into the faster-moving lane. The lane you have switched to slows down, and the one you were in suddenly begins moving at a much faster pace, leaving you further back than if you had remained where you were.

This, essentially, is what happened at Nedgroup with its Managed Fund. At the end of last year Nedgroup “switched lanes”, from RE:CM to Truffle Asset Management. Truffle’s own balanced fund is among the top performers over the past few years (13.21 percent a year over three years), but, like most balanced funds, its performance this year has been subdued.

The trouble lay in the timing. Nedgroup switched just before RE:CM’s investment philosophy, after yielding negative results for longer than expected, began to pay off. Investors – and the executives at Nedgroup, no doubt – could only watch from the sidelines as RE:CM surged forward: its own balanced fund was up about 19 percent for the year at the end of September.

Ironically, this is the only fund in Nedgroup Investments’s basket of unit trusts to have performed so badly. In fact, the manager’s funds did so well overall that it won the Raging Bull Awards for best local and offshore manager of 2015.

OBLIGATIONS TO INVESTORS

All unit trust companies are required to publish fact sheets, now known as minimum disclosure documents, for their funds. These tell you, among other things, what the fund is invested in, its past performance and how it is performing relative to a benchmark, and they provide commentary from the fund manager. The companies also send out regular newsletters informing their clients of market developments and changes to their funds.

So, did Nedgroup’s obligations to its Managed Fund investors end there?

In 2014, in line with its Treating Customers Fairly approach, the Financial Services Board (FSB) issued Board Notice 92 which, among other things, addresses the marketing of collective investment schemes. It states: “A manager may not advertise or market any collective investment scheme or portfolio in a manner that is likely to create a misleading or false statement, promise or forecast regarding the collective investment scheme, or … in a manner that is fraudulent, misleading or deceptive in respect of … the risks associated with the collective investment scheme.”

When approached for comment, the FSB says that Nedgroup fulfilled its minimum disclosure obligations in terms of the notice. However, investors can lodge a complaint with the Registrar by calling 0800 110 443 or emailing info@fsb.co.za