Last Updated on 28/08/2024 by Carl-Peter Lehmann
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 2024, 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. We’ve tried to isolate the retail share classes from a fee perspective to offer the best comparisons.
Comparing Top Balanced Funds for Retirees
We’ve compared performance stats over 5-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, Fairtree, Centaur, and Long-Beach. More well-known funds, such as the Allan Gray Balanced, Ninety One Opportunity, and Coronation Balanced Plus Funds – 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.
Best Balanced Funds Over 5 Years
The PPS Managed Fund and Fairtree Balanced Fund are neck and neck with annualised returns of 13.67% and 13.66% respectively. The High Street Balanced Fund comes in third with its 13.47% return. The ABAX Balanced and Aylett Balanced Funds are consistently amongst the top performers and have been for a long time. All these funds also comfortably exceed the broader mandate of funds in this category which is to achieve returns of Inflation Plus 5 (approximately 10% p.a.). The peer group average is 8.96%, well below Inflation Plus 5.
Best Balanced Funds Over 10 Years
The Aylett Balanced (10.60% p.a.) and ABAX Balanced Funds (10.33%) are the top performers over a 10-year time frame. The Long Beach Managed Fund comes in at third place, with the Centaur Balanced and Gryphon Prudential Fund (an actively managed low-cost index fund) rounding out the top five.
Here it becomes apparent however, how few funds are achieving returns of Inflation Plus 5, when you even have two of the top performers falling short. The peer group average is only 6.99% p.a. which speaks to the challenge the retirement fund industry faces to deliver the kinds of returns retirees (and those saving for retirement) need.
Further Reading: Critical Investment Advice for Retirees
Best Balanced ETF or Index Funds for Retirees
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 10-year average return of 9.37% p.a. (placing it in the top five amongst its entire peer group). Over 5 years it also tops the list with a return of just under 11% p.a. The rest and more familiar names (Sygnia, Satrix, Nedgroup, 10X) all have returns that also comfortably outperform their peer group averages. Prescient and 10X don’t as yet have performance records that date back 10 years.
Now Read: Who are Amongst The Worst Performing of the Big Balanced Funds
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.
Read Next: What Makes Henceforward The Best Financial Advisor for Retirees
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 2024, 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 always guide your decisions. But what we really are aiming to show, is that you should consider including funds beyond the widely advertised ‘big names’ to your portfolio. Boutique managers like ABAX, Amplify, Fairtree, Aylett, Truffle, 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.
Read Next: The 10 Biggest Retirement Planning Mistakes To Avoid
Carl-Peter Lehmann
Carl-Peter is a Director and Partner at Henceforward. He has more than 20 years experience - is a CERTIFIED FINANCIAL PLANNER® and Investment Professional - and is passionate about Helping Retirees achieve the goals and outcomes most important to them.
