Why choosing balanced funds is smart

Patrick Cairns Moneyweb

According to the Association for Savings and Investment SA’s (Asisa’s) latest statistics, balanced funds are by far local investors’ most popular choice. Nearly a quarter of all money invested in SA funds is in multi-asset high-equity portfolios (2017: R490 billion).

Is this the best place for investors to be putting their money?

Earlier this year, Moneyweb looked at whether investors are giving up returns by investing in balanced funds rather than pure equity mandates. The conclusion was that the average multi-asset Source: Allan Gray high-equity fund had outperformed the average equity fund in SA over five-, ten- and 20-year periods.

This suggests choosing lower-risk balanced funds over equity funds has been smart. Investors have reduced volatility and earned higher returns.

A fair criticism, however, is that it takes a very broad average. It also looks at fund returns, rather than investor returns, as they may have moved in/out of those funds at different times.

Is it possible to tell whether individual investors have been better off in balanced funds, rather than taking an average? This data is hard to come by.

However, Allan Gray conducted an analysis that’s as close as we’re likely to get for now. It scrutinised the money-weighted return of the total flows into and out of its equity and balanced funds (calculated the return on the average rand invested in each portfolio).

This isn’t, strictly speaking, the average investor return, as it’ll be heavily impacted by the behaviour of large investors moving large sums into/out of the funds. But it provides a good picture of an ‘investor return’ rather than ‘fund return’ over a period.

The table shows an Allan Gray Equity Fund investor, on a pure return basis, would’ve come out slightly better than one in the Allan Gray Balanced Fund over this period. But this is by a very small margin, at much more risk.

On a risk-adjusted return basis therefore, investing in the balanced fund would’ve been better.

As Allan Gray manages the largest funds in both categories, this is a meaningful sample.

Interestingly, the average investor return is actually higher than the fund return. This isn’t expected, as poor investor behav- iour generally results in reduced returns.

Allan Gray’s Shaun Duddy explains, however, that as these funds have grown larger, the flows into and out of them have become a much smaller percentage of the total. Thus the difference between the fund return and average rand return has shrunk.

The difference between the investor return and fund return is therefore small enough to be largely insignificant. These funds have also experienced strong positive performance over this time, but have generally seen net outflows. Thus, on average, investors have been selling on the way up, rather than the way down. This is considered good investor behaviour and would lead to higher average rand returns.