The balanced solution that’s far from passive

By Kingsley Williams, CIO of Satrix

As investors we’re all looking for the same thing: a certain outcome and a smooth ride to that destination. On top of that, we also want maximum returns with minimum risk. Sounds impossible? Over the short term perhaps. But over the medium to long term it’s not that far-fetched. The key remains: sufficient equity exposure; diversification; low fees and low correlation between funds in a multi-managed solution.

Asset allocation is like a weather forecast

Comparing your investment journey to a boat race across the ocean, strong tailwinds are essential for reaching your destination, even though the water around you gets choppy. In the world of investments a sufficient allocation to equity is that tailwind. The wind may sometimes drive you off course for a while, but over time your boat re-aligns with its destination. Similarly, your portfolio needs sufficient time to recover from setbacks if you have a high allocation to equity.

Over any three years balanced funds have given positive returns

As mentioned, high-growth returns over the medium to long term is possible with little risk of capital loss, particularly if you define ‘medium-term’ as three years. We analysed the rolling median three-year returns of funds in the SA Multi-Asset High Equity category as well as the median three-year returns of funds in the SA General Equity category from January 1997 to December 2017.

The result was surprisingly encouraging to investors: not in any of the rolling three-year periods within the last 20 years studied did the median of the SA Multi-Asset High Equity category report a negative return figure. Even for the three years to March 2009 – the low of the financial crisis aftermath and a negative return period for equity investors – investors in high equity balanced funds reached a positive outcome. Given some time, they were quickly back on track to reach their investment destination.

The Satrix Balanced Index Fund is right up there with the best

2017 seems to have been the year for index-tracking to shake off any second rate mantle it may have been handed and really show investors that index-tracking is anything but passive and a credible competitor for actively managed balanced funds.

The fund which was able to demonstrate this best is the Satrix Balanced Index Fund, which ended the 2017 year as the second-best performing balanced fund among 173 retail funds and the top performing index-tracking balanced fund. (There are 173 balanced funds available at present in the multi-asset or balanced fund category, of which 11 are index-tracking balanced funds.)

But note that all index-tracking balanced funds are not the same. They tend to differentiate themselves in a few areas:

• They do not all have the same strategic allocation to available asset classes. The vast majority of funds have a static allocation, but some take tilts around a strategic allocation in an attempt to improve performance over time.
• They do not all include an allocation to all the available investable asset classes.
• The vast majority of the funds include index trackers in each of the underlying asset classes; some of them use enhanced indexing in an attempt to boost alpha.
• The frequency of rebalancing the strategic asset allocation differs.

These differences become important when comparing performance over time and when choosing which index-tracking balanced fund to invest in.

Well balanced but not bland

The Satrix Balanced Index Fund has the following unique traits:

• a unique equity SmartCore™
• a strategic asset allocation that is rebalanced semi-annually
• a 70% allocation to equities – 55% local SA equities and 15% offshore equities
• a small allocation to local cash of 5%
• an annual management fee of 0.35% + VAT for direct retail clients and 0.25% + VAT via LISPs

These strategic allocations and regular re-balancing, as well as low costs, steer your investment boat strongly in the right direction.

The benefits of a blend

Most investors would typically have two to four balanced funds in their portfolio. So, we’ve also looked at the impact of blending a 25% allocation to the Satrix Balanced Index Fund into your portfolio (proxied by the 10 largest SA Multi-Asset High Equity funds) on your portfolio’s performance. We’ve measured the period since January 2016 (when we revised the equity strategy of the Satrix Balanced Index Fund) to the end of 2017 and found that performance was improved.

But what about risk? Interestingly, the Satrix Balanced Index Fund mostly has lower correlations of monthly returns with any of the 10 largest funds than they have with each other (with two exceptions). Despite the higher volatility of the Satrix Balanced Index Fund, including it in the blend actually lowers the volatility of the blend.

Because of the lower correlation of the Satrix Balanced Index Fund with the other funds, and with the lower fees of the Satrix Balanced Index Fund, overall performance was improved.

Despite the many risks of including equity in your portfolio, blending funds well and including an allocation to a smartly balanced index tracking fund like the Satrix Balanced Index Fund, means you’re far more likely to safely reach your investment destination.

Disclaimer:  Satrix Managers (RF) (Pty) Ltd, a registered and approved Manager in Collective Investment Schemes in Securities. Collective investment schemes are generally medium- to long-term investments. Past performance is not necessarily a guide to future performance, and that the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available from the Manager on request. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The Manager has the right to close the portfolio to new investors in order to manage it more efficiently in accordance with its mandate. The maximum fund charges for the Satrix Balanced Index Fund include (including VAT): An initial advice fee of 0%; annual advice fee of 1.14% and annual manager fee of 0.39%. The latest TER is 0.76%. The performance ranking of the Satrix Balanced Index Fund (3^rd in its Asisa category) is according to Morningstar. The return of the fund since inception to end 2017 was 9.69%. The highest and lowest annual returns since inception were 19.04% and 4.03% respectively.