If you’re a retiree in South Africa, it’s likely that a significant portion of your retirement capital is invested in balanced funds. This could be through various retirement fund vehicles such as Living Annuities that provide your necessary income, or retirement annuities that let you continue enjoying certain tax benefits. In this article, we’ll explore some of the best balanced balanced funds for retirees in 2023, the top balanced fund from a performance standpoint, and what could be considered the best balanced ETF or index fund. There are also other factors to consider when constructing your investment portfolio as a retiree, so let’s dive in.
What is a Balanced Fund?
Balanced funds are broadly defined as unit trust funds diversified across various asset classes, such as equities, bonds, and cash. Most adhere to the regulation 28 investment restrictions defined by the Pensions Fund Act, which dictates the maximum limit each asset class can occupy within a fund. In this context, balanced funds which adhere to regulation 28, can hold a maximum of 75% in equities, with 45% of assets able to be invested offshore. ASISA classifies these funds under the South African Multi-Asset-High-Equity category, where balanced funds can be compared to their peers.
The Best Balanced Funds for Retirees: Understanding the Playing Field
The appropriateness of a balanced fund for your retirement capital can be a matter of debate. Once you purchase a Living Annuity in the open market, you’re not restricted to investing in regulation 28 compliant funds only. Constructing an investment portfolio at retirement to generate consistent income is distinct from building a pre-retirement portfolio aimed at capital appreciation. Therefore, understanding your income needs, risk tolerance, and lifestyle should guide your portfolio construction.
But for the purpose of this exercise, we’ve analysed Morningstar data within the South African Multi-Asset-High-Equity category as comprehensively as possible to offer insights. Because balanced funds are still widely used in the typical portfolio of a retiree. The challenge of our analysis however, lies in the fact that a single fund can have multiple listings, each representing a different fee class of the fund. For instance, the retail or individual investor fee class (which is usually the most expensive) – and various institutional fee classes, which are paid by institutional investors. Naturally, the lower the fee, the higher the net return, and this can significantly impact the fund’s net return and its ranking relative to its peers.
Comparing Top Balanced Funds
We’ve focused on retail share classes and compared them over 7-and 10-year periods to highlight consistency over a market cycle. Longer-term comparisons are also tough because there are significantly fewer funds to compare that have been around for 15 or 20 years. So a higher relative ranking is a lot easier when the competion is thinner. Our analysis reveals that most top-performing balanced funds are from ‘lesser-known’ (or boutique) fund houses like Aylett, Abax, Centaur, and Long-Beach. More well-known funds, such as the Allan Gray Balanced, Ninety One Opportunity, and Coronation Balanced Plus – have become so large that their potential investment universe shrinks, contrary to smaller, more flexible funds. And that means maintaining relative outperformance with the names we’re more familiar with becomes harder and harder.
The Aylett Balanced Fund stands out as the top balanced fund over 7 years with an average return of 11.47% p.a., although it lacks a 10-year track record. Over a 10-year period, the Long Beach Managed Fund takes the lead as the top performing balanced fund, delivering 11.63% p.a., with the ABAX Balanced Fund a close second.
Best Balanced ETF
In the realm of balanced ETFs, options are more limited. Nevertheless, several low-cost balanced index or passive funds could appeal to retirees due to their attractive fee structures. The Gryphon Prudential Fund stands out with its low total investment charge (TIC) of 0.52% and a 7-year average return of 9.73% p.a. Not many have 10-year performance track records, so we have looked at how they compare over 7 years. The notable exception here is 10X and their index fund which doesn’t have data on Morningstar that shows a return going back 7 years.
What About Volatility and Risk?
For retirees seeking balanced funds, managing portfolio volatility is as crucial as the absolute returns, especially during income withdrawal. This concept is known as sequence of return risk and is particularly significant in the early years of retirement. Drawing an income during market turbulence can compound losses and deplete capital more quickly. Our philosophy in constructing retirement portfolios for clients emphasizes both managing volatility and optimizing returns. Adding hedge funds, smoothing funds, and other alternative assets can diversify your portfolio effectively.
The dangers of sequence risk are perfectly illustrated in this example. You achieve the exact same real return of 6.5% p.a. over 10 years. Except in scenario 1 – the first 5 years are the ‘good years’ as markets and the portfolio value increase; with returns at the back end negative. Scenario 3 is simply the inverse of scenario 1 – your first 5 years are terrible and all the good returns happen in the back half.
The outcome? With the exact same annualised return, you have less than half the capital at the end of 10 years in scenario 3 where you effectively experienced sequence risk in your portfolio. Which is why when constructing your portfolio as a retiree, you shouldn’t only be focusing on the absolute return a fund can provide, but managing the risk of severe drawdowns by limiting volatility in your portfolio.
Conclusion: So is there really a best balanced fund for retirees?
The title of ‘best’ really is a misnomer because it is entirely subjective and in the eyes of the beholder. However, when building or reviewing your investment portfolio in 2023, this data and insight should prove helpful. There are also always various other considerations – such as your required income level, risk tolerance etc. – so proper risk management and a thorough retirement lifestyle planning analysis should also guide your decisions. But what we really are aiming to show, is that you should also include considering funds beyond the widely advertised ‘big names.’ Boutique managers like ABAX, Amplify, Fairtree, Aylett, Truffle, Long Beach, Matrix, and others are all worth exploring.
At Henceforward, we strive to uncover these specialists and hidden gems. Our relationship with our discretionary manager, Graviton, allows us to conduct comprehensive, independent research in a vast universe of options, providing tailored portfolios that move beyond the ‘usual suspects’ where returns have often been underwhelming over a prolonged period. Giving our clients access to some of the top balanced funds and boutique managers via our customised investment solutions, helps us deliver better outcomes for everyone.