The sluggish economy, expensive stock market, looming ratings downgrade and possible interest rate increase all combined make for a tough climate for investors seeking returns in SA.
Regardless, many retirees, or those saving up for their golden years, will continue to opt to put a large portion of their nest eggs in riskier unit trusts, hoping for higher returns. The riskiest unit trusts allowed by law are balanced funds.
Balanced-fund managers are walking a tightrope to beat inflation and deliver on a dual mandate to investors, namely that of growing the underlying capital while delivering inflation-beating returns. With the Pension Funds Act limiting balanced funds’ offshore exposure to 25% of their underlying capital, almost all managers have allocated the maximum amount they are allowed to foreign assets.
The weakening rand has proved an unlikely tailwind for many balanced funds this year and acted as a kind of hedge.
The balanced-fund managers featured in this issue were good performers on Morningstar Research’s list over the past 12 months.
1. Truffle Balanced Fund
Fund manager: Charles Booth
Truffle Asset Management’s Balanced Fund has a large exposure to local financial and property stocks, which it views as defensive in the current economic conditions, according to Charles Booth, one of the fund’s managers.
“Value is not as easy to find as a year or two ago,” he says. “We’ve got a lot of exposure to financials, which we think is defensive. That includes property.”
The fund also has a large exposure to British American Tobacco, where there is a “very high degree of certainty” of earnings, Booth says.
His tip for investors choosing a balanced fund is to be comfortable that the manager would ensure “good long-term returns”.
In the case of a balanced fund, the manager’s objectives are more complicated than is the case with a straight equity fund, says Booth. On the one hand the objective is to generate a good return, while on the other, the manager tries to preserve capital, he explains.
2. Autus BCI Balanced Fund
Fund manager: Niël Hougaard
Autus Fund Managers’ Balanced Fund is seeing more value in stock picks offshore than locally, says Niël Hougaard, manager of the fund.
“It is no secret that our fund is underweight in equities,” he says. “If you aim to add value to a portfolio, it comes down to which companies you pick to include in your fund.”
In this regard, Hougaard still sees opportunities in certain local equities such as the PSG-linked companies, including Curro Holdings, Zeder Investments and Capitec. In addition, he is optimistic about the earnings potential of local companies with a foreign income stream, such as Steinhoff International and Naspers. Other opportunities, however, are limited due to the valuation of local stocks.
“The JSE’s All Share Index trading at a price-to-earnings ratio of 26.8 worries me,” Hougaard says. “Utilising your full offshore allocation is definitely a better option.”
With regards to investors having to decide where to move their retirement money to, Hougaard’s tip is to look for those funds that have yielded inflation-beating returns over the long term.
“The balanced fund must beat inflation and yield real growth in addition to protecting the investor’s purchasing power over time,” he says.
In addition, he says investors should keep abreast of the changes in the market and industry. Larger fund managers may lack the nimbleness associated with boutique-like outfits, which can move swiftly in and out of positions to optimise returns growth, he explains.
“It is, however, very important that the investor knows what is happening in the market,” he adds.
This is an excerpt from an article that originally appeared in the 19 November 2015 edition of finweek. Buy and download the magazine here