Financial Mail - Investors Monthly
Strengthening retirement
ow equity funds are one of the largest unit trust sectors, with R210bn under management. As they are limited to 40% exposure to equities, they are considered a good option in the last five years before retirement, and the early years of retirement itself.
The risk of absolute loss is far lower than in a balanced or equity fund, but there is still enough equity for the fund to provide real returns over the medium term.
As JSE equities have been a dismal performer over the five years to March 2020, many investors have fallen out of love with these funds. They have sought refuge in the multiasset income funds, which may not invest more than 10% of their assets in shares, including pref shares. In the 12 months to June 2021 the income category saw inflows of R15.4bn while low equity funds saw outflows of R4.8bn.
That has started to turn, as investors realised the opportunity cost of not being invested in the JSE as shares bounced back from lockdown lows.
Many low equity funds have also shown returns which stacked up well against high equity funds (with a 75% ceiling) and medium equity (60%). So the sector has enjoyed inflows at the expense of lower-risk income funds and higher-risk balanced funds.
The funds included this month are all established funds with their own following among financial advisers.
The largest is the R46bn Allan Gray Stable Fund, also popular as a low-risk member choice at pension funds.
With a return of 15.4% over
Lthe past year it has proved that a consistent allocation to equities can pay off, even after four disappointing years. The annualised return over five years is just 6.8%.
Another popular fund which comes under the microscope is Nedgroup Stable. Run by Foord Asset Management, which has just celebrated 40 years of managing money, it also hopes to give consistent returns to clients by pulling a number of levers — equity selection might be one of the least important, alongside active asset allocation and weighting assets based on their expected risk/return profile.
And even equity selection needs to be different from selecting for a balanced or equity fund: there needs to be a tilt towards low beta (lower volatility) shares. Preferably, idiosyncratic sectors such as gold shares need to be excluded. Foord does this explicitly, preferring to get gold exposure through the NewGold Exchange Traded Fund.
Old Mutual has abandoned its boutique model and the Equities and MacroSolutions boutique has merged. Old Mutual Stable Growth has a strong asset allocation specialist in John Orford and a strong stock selector in Meryl Pick. The fund has done well, with an 18.6% return over the past 12 months. But it has not been well followed outside the dedicated Old Mutual distribution channels and, with R7bn, is a lot smaller than its counterparts at Allan Gray, Nedgroup or Coronation.
Midsized asset managers often look for distribution partnerships. Nedgroup has been the most successful at forging these partnerships.
But Amplify, part of the Sanlam Multimanager business, offers a similar approach. Its Wealth Protector Fund is managed by Truffle, which has about R38bn under management and so can be a lot more nimble than its giant competitors. The Wealth Protector Fund has about R2bn under management, but wants to grow much larger with Amplify as its distribution partner.
Stanlib Cautious Balanced is positioned as a much smoother ride than the main Stanlib Balanced Fund, with both the bond and equity components positioned to provide real returns. Two years ago Henk Viljoen was drafted in from the fixed income team to revive the fund alongside equity specialist Herman van Velze. It has recently grown from R7.8bn to about R9.2bn. Its advisers have recognised that when these funds are run well, they can provide long-term returns similar to balanced funds, with little more volatility than multiasset income funds. ●
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