FUND REVIEWS

Prudential Inflation Plus Fund, Stanlib Balanced Cautious Fund, SIM Inflation Plus Fund, Old Mutual Stable Growth Fund, PSG Stable Fund

The Morningstar database contains 220 funds in the cautious allocation category. This type of fund is designed for investors who want a broad diversity of asset classes in a “one-stop” shop. The funds can invest up to 40% in equities, and all the major ones in the sector have the discretion to take up to 30% offshore.

In the risk spectrum it sits between variable fixed income and balanced funds. It makes up 12% of the unit trust sector. But over the past 12 months it has come under pressure, with net outflows of R6bn.

Investors expect some extra return from investing in a cautious allocation fund, rather than staying in the cash or fixed-income sector. But over the past three years that extra return has not materialised. All the asset classes in which these funds invest have produced mediocre returns.

David Knee, chief investment officer of Prudential, says it would be the wrong reaction to exit these funds impulsively and move into cash.

Knee says nobody can predict when a recovery will take place, but it is likely to be lumpy so there won’t be time to come back in and enjoy the full ride. There’s no better opportunity than now to invest monthly into these funds.

And many more inflation hedges are likely to be available in public markets soon, such as infrastructure funds, as well as a much more sophisticated corporate bond market.

There is a lot more flexibility available to these funds now that up to 30% can be invested internationally, plus a further 10% in the rest of Africa. There isn’t always going to be a good match between liabilities linked to SA inflation and hard currency assets, but Knee says that, in the long run, offshore assets are a useful way to preserve capital, given the longterm trajectory of the rand.

The funds in this sector are all from established houses, but we have left out two of the largest funds, Allan Gray Stable and Coronation Balanced Defensive, which have featured in earlier issues. In any case, these funds have become the

There is a lot more flexibility available to these funds now that up to 30% can be invested internationally, plus a further 10% in the rest of Africa

default options for the less industrious financial advisers, who need to look more broadly at the market.

The second-largest, Prudential Inflation Plus, has been included as it took a pioneering approach to dynamic asset allocation back in 2001, when the orthodox wisdom favoured a fixed-allocation approach. The only fund that needs attention out of the five is Stanlib Balanced Cautious, which has underperformed in the face of continual restructuring and some poor leadership. But it has strong distribution support through Standard Bank, and some clever minds are doing their best to revive this fund and its manager.

There are some interesting contrasts between the funds in this category. Both PSG Stable and Old Mutual Stable Growth are well managed and deserve a higher share of the financial advisers’ pie; PSG Stable is ahead, but investing in either or choosing their sister balanced funds would be a good decision for the conservative investor for the longer term.

These funds are to some extent run as diluted balanced funds, with extra cash and bonds. SIM Inflation Plus, like its Prudential namesake, has an more academic approach and is less predictable.

Those people who stayed away from SIM Inflation Plus after its former manager, Philip Liebenberg, moved to Abax, can get back into the water. The current manager, Natasha Narsingh, might be a retreaded mining analyst but she’s fiercely clever and fully understands the serious responsibilities of running a low-risk fund.

Natasha Narsingh