Beware rocky markets

2013-06-25 10:00

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The best way to deal with volatility remains investing in a multi-asset fund

With the rand plummeting, the JSE down more than 4% this month and government bonds shedding 9% of their value, the only place to make money, it seems, is in developed offshore markets.

While most fund managers have been urging South Africans to invest offshore for the last 18 months, no one could have predicted exactly when South Africa’s markets would tumble.

By nature, markets are notoriously volatile and trying to second-guess short-term movements often increases ones risk.

Research shows repeatedly that investors tend to significantly underperform the fund they are invested in because of their attempts to time the market.

During a market correction, investors panic and withdraw their funds right at the bottom, missing nearly all of the recovery. Only once the recovery is established do they reinvest in a near-peaking market.

A diversified fund with lower volatility (price movements) can help to rein in the irrational response to sell after a market crash and thereby improve the investor’s final returns.

Pieter Koekemoer, the head of personal investments at Coronation Fund Managers, says that rather than trying to second-guess the short-term rand movements, which are difficult to predict, the best way for the average household to deal with volatility remains to invest in a multi-asset fund with a risk budget appropriate to the investor’s need.

“Just make sure it has the ability to include foreign assets,” says Koekemoer.

According to Richard Carter, the director of Allan Gray Life, not even the best fund manager in the world can accurately predict what the market will do.

“This is why it is so important to ensure you have a diversified portfolio,” he says.

“You can reduce your risk exposure to particular sectors simply by investing in other stocks, which can offset a fall in – for example, resources.

“Our balanced fund, for example, is invested across equities, hedge equities, fixed interest and gold. Of that, a certain percentage across these is invested offshore.

“This ensures that regardless of the rand’s movement, your investment is partly protected through foreign exposure.”

Coronation, which has held full offshore allocations across its multi-asset funds, believes that the long-term trend for the rand is to remain weak and that there are better investment opportunities offshore.

“Even at the current rand value, we believe the long-term offshore opportunity is more attractive than the JSE,” says Koekemoer.

Over the last two years, many share prices in developed markets have looked far more attractive than South African equities.

Leading multi-asses funds

A multi-asset fund allows the fund manager to allocate money between different asset classes. The fund manager then makes the decision as to which asset classes to invest in.

Multi-asset funds have increased in popularity and now account for the majority of inflows into unit trusts.

According to the Association of Investment and Savings South Africa, this category held 44% of industry assets and attracted R26.2?billion in net inflows in the first quarter of this year.

The amount of equities a fund can hold will depend on its mandate.

While lower exposure to equities will reduce short-term price movements of the fund, it also reduces the potential long-term returns:

1. A low equity multi-asset fund can only hold up to 40% in equities and tends to be more conservative.

These funds often target a specific return relative to inflation. According to research house Morningstar, over the last five years ending May 31 2013, the top performing fund in this sector was Coronation Balanced Defensive, which returned 12.97% per annum, followed by Nedgroup Investment Stable Fund.

2. A medium equity fund can hold up to 60% in equities.

These funds generally comply with the prudential investment guidelines, allowing them to be used for retirement fund investments and are usually referred to as balanced funds.

According to the Morningstar figures, the top performing fund in this sector was Coronation Capital Plus followed by Montrose MET Moderate Fund of Funds.

3. A high equity fund can hold up to 75% in equities.

Once again, Coronation tops the tables over five years with its Balanced Plus Fund delivering 13.2%. It is also the leading fund over 10 years, followed by the Dotport MET Prudential Fund of Funds. Allan Gray Balanced Fund has been a consistent performer, ranking fourth over 10 years and has recently benefited from its offshore exposure.

4. Flexible funds have no maximum or minimum limits on how much equity it can hold. The top performing flexible fund is Centaur MET Flexible, followed by Stanlib Flexible Property Fund – although this fund has a specific bias to property.

Rezco Value Trend has been the most consistent performer in this sector, delivering 14.11% over five years and more than 16% in the first five months of this year.

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