Multi-asset funds are not delivering

TWO POINTS of discussion in a media presentation last week by the Association for Savings and Investment South Africa (Asisa) caught my attention: the first was the miserable performance of balanced funds over the past five years, the second the significant progress the investment industry has made in transformation.

Sunette Mulder, senior policy adviser at Asisa, and Thabo

Khojane, the association’s deputy chairperson, presented statistics on the performance of unit trust funds up until the end of 2018, as well as investment inflows and outflows among the different sectors according to asset allocation.

The statistic that struck me was that real (after-inflation) returns on balanced funds (multi-asset funds that can hold up to 75% in equities) over five-year rolling periods have dropped below zero for the first time in over two decades. This means that if you are invested in the average balanced fund, you have received a belowinflation return over five years. Of course, not every year was negative. The problem with averages is that a single extreme event can significantly affect the result.

High-equity multi-asset funds have had two bad years in the past five: in 2016 they were down more than 5% and last year they were down more than 8% in real terms. Which prompts the question: do high-equity multi-asset funds pose a significantly lower risk to investors than pure equity funds?

They should. Managers of these funds do not have to be invested to the maximum in equities. They can move out of equities into cash or other assets if they believe the market is getting overheated. This is one huge advantage they have over pure equity funds and all passive funds. Yet it appears few managers make full use of this means of mitigating risk.

High-equity multi-asset funds continue to be the most popular of the unit trust categories, but recent years have seen a shift into safer, interest-bearing funds. As at December 31, 2018, the bulk of assets in locally invested portfolios were held in multi-asset funds (49%), followed by interest-bearing funds (29%), equity funds (19%) and real estate funds (3%).

Mulder says collective investment scheme inflows of R93.5 billion in 2018 were wiped out by the negative performance of the markets: assets under management declined from R2.25 trillion at the end of 2017 to R2.24trn at the end of 2018.

However, she says, many investors are still braving the market volatility in return for the potential of higher returns typically offered by highequity portfolios over the long term. Domestic multi-asset high-equity portfolios last year again attracted the second-highest net inflows (R19.5bn) and general equity portfolios attracted R12.1bn.

Over the long term, Mulder says equities are still the place to be if you want inflation-beating returns, as shown by the table.

TRANSFORMATION

Asisa chief executive Leon Campher presented statistics on transformation in the investment industry. He highlighted the Asisa Academy’s sterling role in the education and development of black professionals, and the work of the Asisa Foundation, which, with impressive backing from the big financial houses, supports young entrepreneurs. A few facts:

Black ownership in the industry is up from about 16% in 2005 to more than 26% in 2016, exceeding the broad-based black economic empowerment target of 25%.

Targets for board membership, executive directors and top management had been exceeded in 2016, although there was still some way to go in reaching the targets for senior, middle and junior management.

Excitingly, the Asisa Academy’s survey of 650 people among 31 participating companies showed that a quarter of portfolio managers were black, as were 51% of research analysts.