Multi-asset income funds: more return for less volatility

Dramatic volatility in bonds and equities in the past five years has given investors looking for stable income and capital growth many sleepless nights. Investors in a well-managed multi-asset income fund would have slept a lot more soundly.

The efficient frontier, which maps the highest level of achievable returns against the risk incurred, is lowest for money market funds, in the middle for income funds and is highest for bond funds. A multi-asset income fund can hold assets from all three types of funds.

The reason this is important is that over the past five years cash has delivered smooth and steady returns through various crises, e.g. SA’s credit rating downgrade and Covid, but it is not the best asset to hold in a falling interest rate environment. The return from bonds has been higher, but with significant volatility. Managers of multi-asset income funds are able to actively shift between different fixed income asset classes and property, to deliver a smoother return profile, at lower risk.

With interest rate cuts on the horizon, it might be prudent to step up from an income fund or cash to a multi-asset income fund. If SA enjoys a structural shift in its economy under the new Government of National Unity (GNU), the effect will be to lift every asset class except cash.

The STANLIB Flexible Income Fund currently holds 62.4% of its assets in bonds, 21.9% in credit, 2.5% in cash, 5% in property, 4.9% in offshore bonds and 3.3% in offshore property (as at 26 June 2024). Between March and May, ahead of SA’s National Election, the fund held some dollars in the event the outcome was negative for markets, but by end-June the fund held no dollars. In May the managers took further precautions, by reducing holdings of both nominal bonds and credit and increasing cash. By end-June, the fund had reverted to higher-returning asset classes. The managers have also invested again in property, on which they realized profits for the fund earlier in the year, as they believe that in a more positive economic environment property will appreciate.

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