Balanced Funds: A Safer Approach to Investing In Volatile Markets

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The current volatile global economy and onset of a stricter regulatory environment in the financial services industry by the Financial Services Board (FSB) has resulted in a large number of financial advisors opting to outsource asset allocation to balanced funds.

This essentially entails the financial advisor allocating a larger portion of their client’s portfolio to multi-asset balanced funds from traditional asset specific funds such as a pure equity funds.

Balanced funds, as the name suggests, are funds which typically invest in a combination of equities, debt and cash instruments. In South Africa there has been a significant shift from specialist funds to balanced funds, in both the retail and institutional space. Besides the lower levels of risk associated with balanced funds in relation to their riskier counterpart, equity funds, and higher levels of return in relation to their safer counterpart, money market funds, one of the added benefits of balanced funds is that the fund managers make all investment decisions for investors in the fund, in terms of asset allocation, security selection and risk management.

The benefit of having a balanced fund became apparent when the markets plummeted in 2008 — balanced funds, due to their exposure to debt and cash investments, suffered lower losses compared to pure equity funds. This isclearly indicated in the below chart.

Rezco Value Trend - balanced funds outperform equity funds

The most important benefit of investing in a balanced fund is to ensure suitable asset allocation, which is insulated from the swings of euphoria or the depths of panic, which investors are typically prone to.

Simply put this would be a fund that preserves an investor’s capital by protecting on the downside while creating wealth by participating on the upside.

The other advantage is in terms of the risk-adjusted returns that a balance fund offers. There have been instances where balanced funds outperform even pure equity funds, while at the same time exposing their investors to far less risk. This is clearly shown in the scatter chart below over the last 7 years. This ideal scenario is a good measure of the stock picking and portfolio management capabilities of the fund manager.

rezco value trend

Key Name Annualised Volatility Performance
A REZCO – Value Trend 9.66 227%
B Foord – Equity R 14.89 203%
C Prudential – Equity A 14.21 203%
D Coronation – Equity R 15.5 188%
E Sanlam – SIM General Equity R 15.2 181%
F Allan Gray – Equity A 13.56 176%
G Nedgroup – Investments Rainmaker A 13.32 157%
H Investec – Equity R 15.07 141%
I PSG – Equity A 16.28 134%
J Momentum – Equity R 15.87 130%
K STANLIB – Equity R 15.88 123%