Are multi-asset unit trust funds ‘broken’?

A leading financial adviser says the disappointing returns from actively managed multi-asset funds over the past three years are the result of a low allocation to listed property and high fees. reports

Many unit trust investors whose money was put into local investment markets have earned disappointing returns over the past three years: only as much as – or, in some cases, less – than they would have earned if they had invested in cash.

The top-performing money market unit trust fund returned just over seven percent a year over the three years to the end of March; the average annual return from money market funds over the period was 6.59 percent; and the benchmark for cash, the Short-term Fixed-interest Index, returned 6.77 percent a year.

The average annual return of the popular equity general funds, which invest across all sectors of the JSE, was only 4.55 percent over the three years to the end of March, while the FTSE/JSE All Share Index returned 5.98 percent a year over that period.

Investors exposed to bonds earned only seven percent a year over the past three years, while the FTSE/JSE All Bond Index returned 7.45 percent a year.

The asset classes in which investors earned good returns were listed property – on average, funds returned 14.48 percent a year over the three years to the end of March – and global equities and global real estate, with average annual returns of 12.29 percent and 11.79 percent respectively.

Investors who entrusted their money to managers of balanced, or multi-asset, funds, expecting the managers to allocate their money to the asset classes with the best prospects, also have reason to be disappointed with the returns they earned over the past three years.

The most popular multi-asset sub-category, the high-equity funds, on average returned only 6.34 percent a year over the past three years. The second most popular sub-category, the low-equity funds, on average returned 6.71 percent a year.

In response to these returns, one leading financial adviser has asked whether multi-asset funds are “broken”.

Craig Gradidge, an independent financial adviser at GradidgeMahura Investments, says in a blog post that low exposure to listed property – in most cases, only about five percent – and high fees have taken their toll on the performance of many local multi-asset high-equity funds over the past three years.

“Fund managers have been chronically underweight in listed property for many years. This has led to investors losing out on the excess returns provided by the asset class for an extended period. Fund managers have consistently called the listed property sector wrong and have cost investors potentially billions of rands in returns over the past 15 years,” he wrote.

This is one of the reasons passively managed multi-asset funds have out-performed over the short term: the managers of these funds do not take a view on asset classes, Gradidge says. Passive multi-asset funds typically have between five and 10 percent in listed property, he says.

Passively managed funds also have lower investment fees.

Gradidge notes that the three passively managed multi- asset funds with three-year track records have out- performed the average annual return of the multi-asset high-equity sub-category.

The three funds are the Nedgroup Investments Core Diversified Fund, with an annual return over three years of 7.88 percent, the Sygnia Skeleton Balanced 70 Fund, with an annual return of 7.5 percent, and the Satrix Balanced Fund, with an annual return of 6.84 percent.

Gradidge says that when returns are low, as they currently are, fees have a significant impact on returns. “A fund with a 1.5-percenta-year fee would have needed to deliver a total return over the past three years of 25 percent before fees in order to out-perform cash on an after-fee basis.”