Size is very important

MANY MORE: IN 10 YEARS THE NUMBER OF BALANCED FUNDS HAS TREBLED

The larger funds, like Allan Gray, Coronation and Investec, have become more dominant in the last decade. Moneyweb

Over the last decade the amount of money invested in South African multi-asset high-equity, or balanced, funds, has grown from about R50 billion to more than R510 billion. This is the largest unit trust category in SA.

The number of balanced unit trusts available to local investors has also shot up from 70 to 233.

Yet the largest funds have become more dominant.

According to investment firm Corion Capital, the five largest balanced funds accounted for 58% of all assets in this category 10 years ago. They now manage 68%.

Corion Capital chief information officer David Bacher, said: “Over the last 15 years, the likes of Allan Gray, Coronation and Investec have been top decile performers. They also have the largest marketing spend and the biggest distribution.”

The Allan Gray Balanced Fund is the best illustration. It has grown from R23 billion to over R150 billion. Its position as the largest unit trust in this category has been unchallenged.

Does it matter that there is such a concentration in large funds?

“The pros are that people find safety in the well-known brands,” Bacher says. “They understand what they are investing in and are less likely to get large variability of investment returns.

“The cons are that the bigger you are relative to the industry you invest in, the harder it is to implement your best investment view,” he adds.

“And that, in my opinion, is a significant weakness.

“The other factor is market economics. The more competition there is, the better it is for the end consumer.” At the turn of the century large life assurers like Old Mutual, Sanlam and Liberty dominated the unit trust market. However, they have since given way to independent managers like Allan Gray, Coronation and Foord.

So could something similar happen again?

“I think there is opportunity ... and you are seeing evidence of how they are able to outperform,” says Bacher. “You are starting to see the next tier of players, like Laurium, Mazi Capital, Fairtree, 36One, Visio and Truffle growing.”

However, these managers remain at a significant disadvan- tage when it comes to marketing budgets and distribution. Investors remain more likely to select an established manager.

This is not because investors have issue investing in smaller funds. The barrier is the lack of familiarity.

Warren Ingram, executive director at Galileo Capital, explains: “Four to five years ago we started putting some of our clients’ money into Fundsmiths funds, which are well known and established overseas, but relatively unknown here. We had to have lengthy conversations with clients to explain why this should represent a small portion of their overseas assets.”

This sense of security is not unfounded.

There is likely to be far better long-term transfer of knowledge in a big investment team, they should be more efficient in managing costs, and the businesses themselves are more stable.

It’s also worth appreciating that the overall risk to financial advisors is lower when selecting recognised brands.

Lack of familiarity a barrier to small funds.