Steering advisers towards balanced funds

Investor sentiment shows a strong bias towards Balanced Funds as evidenced by the R21.6 billion that flowed into asset allocation funds in the first quarter of 2012. They are undoubtedly a popular investment choice in the current climate of market uncertainty and volatility.

Balanced Funds can and do differ greatly in terms of the high conviction calls made by fund managers. A clear understanding of their vision and mandate should inform which Balanced Fund you invest your client’s funds in.

As investors grapple with lower investment returns – the money market is delivering negative returns at our present inflation rate – we believe that advisers should shift some of their clients’ liquid assets out of cash and into higher yielding assets. A Balanced Fund is an optimal choice to achieve this goal.

The STANLIB Balanced Fund, managed by Herman van Velze and Paul Swanson, is delivering solid returns and is worth considering. Its asset allocation is around 46% in domestic equities, almost 20% in foreign equities, 17.5% in domestic bonds, 2.7% in commodities and 14.3% in cash.

The fund managers’ stock picking philosophy is to look at companies with growing revenue streams, profit momentum, balance sheet efficiency and generally good management teams. Their top ten equity holdings are: Life Healthcare (5.2%), Anglo American (8.4%), BHP Billiton (8%), AVI (3.6%), Woolworths (4.3%), Vodacom (4.4%), Imperial (3.9%), Bidvest (4.2%), Richemont (4.6%) and MTN (8.5%).

Healthcare and Pharmaceuticals top the list of "big theme” equity investments at the moment. This explains the decision to increase the fund’s exposure to Life Healthcare and Netcare, which both have strong management teams. Hospital groups benefit from stable markets and the duo does not believe that government’s proposed National Health Insurance regulations are a threat.

A second major theme in the portfolio is Retail, with overweight investments in Woolworths, Shoprite and Mr Price, as well as MTN and Vodacom, which continue to offer good value. The fund mangers argue that South Africa is a nation driven by the consumer and believe this trend is of a long-term nature.

In terms of equity-class diversification, industrial stocks have outperformed even Property over the three-year period to March 2012. Before selecting a Balanced Fund you should consider the equities in the portfolio as well as interrogating the stocks that are not invested in: Sasol, Naspers, SAB and Kumba are cases in point for van Velze and Swanson. And with the exception of PPC the fund is underweight construction stocks too.

Offshore, we are invested only in equities, no bonds or cash. We are underweight Europe (where we see no recovery any time soon) and overweight North America. Most fund managers agree that notwithstanding the highly pessimistic themes coming out of developed countries at the moment, many companies within those economies continue to report strong earnings growth. It is only governments that are not doing well!

Domestic bonds have been in a consistent bull run since 2000 too, with recent performances due in part to the imminent listing of South African bonds on the Global Bond Index. Global index funds will soon have to buy our bonds to maintain their benchmark weighting.

In net terms, foreign investors purchased more than R40 billion of South African bonds in 2011 and more than R30 billion year-to-date 31 May 2012. We anticipate the dividend yield over the coming year improving from 3.9% to 4.6%.

Overall, the diversification benefits of Balanced Funds provide a buffer against the current global uncertainty, as evidenced by three year returns of between 11.5% and 18% for the STANLIB funds. They are one stop shops for investment through both the volatility and market cycles investors are exposed to on an ongoing basis.