Are balanced funds back in favour?  

South African investors have been more conservative with the majority of flows being ‘parked’ in fixed interest funds in the 5 years prior to 2020 (Graph 1).

Source: Association for Savings and Investment South Africa (ASISA). For the period 1 October 2014 – 30 March 2022. For illustrative purposes only. Past performance is not indicative of future performance.

This trend seemed to shift when investors became keen to participate in the global equity rally following the COVID-19 market crash in early 2020. At the tail end of 2021, local equity experienced its first positive one-year net flows since 2017, as local equity markets outpaced its offshore counterparts.

‘Parking’ money could erode real returns in a high inflation environment

Moving an investment into a low risk fixed interest fund may provide some level of comfort but in a high inflation environment, the real returns could be eroded and turn negative. The initial muted response to inflation by the South African Reserve Bank (SARB) is only being addressed now with a cumulative 125 basis points rate increase since November 2021.

Another consideration is that timing the market is incredibly challenging and investors often destroy value when trying to do so. Generally, investors tend to de-risk after a period of poor returns, and only reinvest after markets have regained a sizable portion of the losses. Therefore, investors lock in this capital loss by capitulating during heightened uncertainty resulting in further capital erosion.

Balanced funds better poised to provide comfort and meet investment goals

In this climate, balanced funds may present a better opportunity set for conservative investors to meet their investment goals.

The appetite for balanced funds has steadily increased, as SA investors appear to be willing to take on a little more risk for the potential of achieving inflation-beating returns over the long-term.

Balanced funds provide inflation-beating returns over the long -term 

This is highlighted by the enduring capability of the PPS Balanced Fund of Funds and the PPS Managed Fund to beat inflation (as a diversified multi-asset portfolio) over the long term, which is shown in Graph 2.

Source: Morningstar Direct. For the period 1 October 2018 – 30 April 2022. For illustrative purposes only. Past performance is not indicative of future performance.

Relative performance

When compared to the largest balanced funds in the South African market, the PPS Balanced Fund of Funds and the PPS Managed Fund have proven to be excellent options.

Money market funds giving negative real returns over the short term

While money market funds may be low risk in terms of volatility, they are giving negative real returns over the short term (as shown in Graph 3), at a time when the PPS Balanced Fund of Funds and the PPS Managed Funds are outperforming their respective benchmarks.

Source: Morningstar Direct. For the period 30 November 2020 – 28 May 2022. For illustrative purposes only. Past performance is not indicative of future performance. 

Conclusion

During challenging conditions, resist the temptation to make radical changes to your investment as the market fluctuates. Trying to time the market by switching between asset classes may erode the value of your investment over time by sealing in the losses and missing out on the highs. Because a balanced fund typically invests in a diversified mix of asset classes that includes equities, bonds and property, with a portion of the funds allocated offshore, these funds are positioned to achieve their set investment objectives over the long term regardless of short-term market movements.