An excellent vehicle for long-term savings
BALANCED FUNDS have become a popular choice for investors choosing underlying unit trusts for their retirement funds. This is because they are an excellent vehicle for long-term retirement savings.
However, Anet Ahern, chief executive officer at PSG Asset Management says investors must ensure that the balanced fund of their choice complies with Regulation 28 of the Pension Funds Act.
She says the majority of balanced funds sit in the South Africa- multi asset low, medium and high equity sectors. Currently, these sectors hold approximately 37 percent of the total assets under management in South African-registered unit trusts.
Funds in these sectors have restrictions regarding the assets in which they can invest.
This makes them automatically compliant with Regulation 28 of the Pension Funds Act.
Ahern informs that balanced funds can have the highest permissible exposure to equity as funds that comply with Regulation 28 may have up to 75 percent of their assets in equities, depending on their mandates.
“While volatile over the short term, equities have demonstrated the ability to grow the most above inflation over the long term.
“As balanced funds can provide investors with the maximum permissible exposure to growth assets over time, they give investors the growth engine they need during the accumulation phase of their retirement saving strategy.”
Ahern says another advantage is that balanced funds can diversify.
“As funds in the multi asset sectors can invest across a very wide range of asset classes, both in South Africa and beyond our borders, this allows them to provide their investors with a large degree of diversification across many industries, countries, regions, currencies and assets.
“Because diversification decreases risk, investors in these funds can achieve solid returns at lower levels of risk.
A further benefit of a balanced fund, according to Ahern, is that a professional manager manages and regularly rebalances your portfolio.
“Fund managers have the knowledge and experience to generally avoid assets that are more likely to lose value from time to time, and to acquire and hold assets that are more likely to increase in value from time to time.
“In addition, investors know that their managers will be able to switch their exposure to the optimal mix of assets quickly and efficiently, without them having to complete laborious documentation and follow a slow transfer process.”
Ahern informs that balanced funds are also available in preservation funds and living annuities.
“Often you will have the same balanced fund available as an investment option in your retirement fund, your preservation fund and within a living annuity.
“This means that investors in these funds can stay invested in the same fund throughout their full saving, preservation and income-drawing cycle.
“They can generally retain these investments even when they change jobs.”
Furthermore, rebalancing in a balanced fund does not lead to a capital gains tax event for the investor, according to Ahern.
“Investors in unit trusts are not subject to capital gains tax (CGT) in respect of purchases and sales made within the unit trust.
“As balanced funds have the broadest exposure to the various asset classes, investors are able to gain or reduce exposure to different securities, instruments and currencies without this triggering a CGT event.”
Ahern emphasises that asset allocation is a skill, and a major determinant of investment returns. She says that balanced funds have a number of advantages for the average investor, and it is for this reason that these funds contain such a large proportion of investors’ savings – whether they are accessed via compulsory retirement products (like pension, provident, preservation or retirement annuity funds) or via direct discretionary investments.
Kyle Hulett, head of multi asset class at Argon Asset Management, agrees that asset allocation is crucial to investment returns.
“Tactical asset allocation is key in finding opportunities in the current economic environment,” says Hulett.
“Investing during the three decades leading up to the great recession was simple and straightforward.
“Every asset class (even cash) outperformed inflation significantly in real terms. Going forward, it is going to be much harder.
“Valuations are high because of quantitative easing (QE), growth is low because of demographics and declining productivity, and volatility is increasing because of high levels of debt,” says Hulett.
However, fortunately, every problem provides an opportunity, according to Hulett.
He says the distortion of markets caused by QE is providing great opportunities for tactical asset allocation (TAA).
“In fact, TAA is both necessary because of lower growth and more fruitful because of higher volatility – balanced fund managers can use the volatility to add returns.
“Specialist funds on the other hand cannot benefit from this real-time, instantaneous decision-making,” adds Hulett.