April 25, 2009
 By Bruce Cameron
Every quarter we have an asset manager beauty parade of quarterly performance statistics both in the unit trust and retirement industries.
I do have a problem with these performance-only parades done by these two branches of the financial services industry. This is the reason why Personal Finance has led the way with the risk-adjusted and consistency-of-performance analyses that are now available.
But these performance-only parades do provide for interesting reading. Currently my colleague, Laura du Preez, is doing an in-depth analysis of the asset allocation and absolute return unit trust funds. Already her research is showing some interesting and very perturbing results, in that there is an excessively wide range of investment results and ever-growing choice of funds in the flexible asset allocation category. Her research will be published in a forthcoming edition of Personal Finance.
Asset allocation managers have the discretion to decide on both the asset class (for example shares, bonds, property and cash) they will invest in as well as the underlying investments in each asset class.
Unit trust asset allocation funds come in various shapes and guises. The main division is between what are called prudential funds, which may have no more than 75 percent of assets invested in shares (to reduce risk), and non-prudential funds, in which the asset manager has no limits on asset class.
This week I want to look at the prudential funds alone. The prudential limits on the various asset classes in which prudential unit trust funds and retirement funds can invest are set in terms of Regulation 28 of the Pension Funds Act.
The most important restriction is that no more than 75 percent of your savings may be invested in shares. This is to protect your retirement savings from the extremes of volatile markets such as we have now.
Variable results
The unit trust prudential asset allocation funds are sub-divided into:
High equity, which are restricted to between 65 percent and 75 percent of total assets in equities (currently 15 funds);
Medium equity, with equities being limited to a range of between 40 and 60 percent (47 funds);
Low equity, with a 40-percent limit on exposure to equities (58 funds); and
Variable equity, which allows the fund manager to invest any amount from zero to 75 percent in equities (56 funds).
The lower the equity component of a fund, the lower should be the short- to medium-term risk of losing money.
According to our data provider ProfileData (which also provided the other unit trust information I have used), across all unit trust prudential categories over one year the top performer (Quantum Core prudential low equity) gave a return of 13.95 percent and the bottom performer (Stanlib Balance Class B prudential variable equity) gave a return of minus 26.27 percent. This is a 40.22-percentage point difference, which is plain horrific.
Apart from placing a serious question mark over some asset managers, this huge difference also raises the issue of whether Regulation 28 is tough enough.
What is of equal concern is that the number of funds in the prudential flexible class continue to grow. For example, in the prudential medium class, there are only four funds with a 10-year track record, 10 with seven years, 15 with five years, and 30 with three years, but 47 now listed.
But let's look at performance in the Regulation 28 context. Over 10 years the top performer was the FNB Balanced prudential variable equity fund (15.95 percent annual average) and the worst was the Advantage Balanced medium equity fund of funds (10.19 percent). A big difference between the two, but at least still positive returns.
Over five years, the top performer was the Allan Gray Balanced variable equity fund with a 17.95-percent annual average. The lowest return was from Momentum Balanced Income low equity fund of funds with a 7.74-percent average a year. Again positive returns.
But at three years and less there is hardly a unit trust prudential fund that gives above-inflation returns. A glance at the accompanying table shows the extremes.
But now let's look at the asset managers who look after the money of retirement funds in the domestic flexible asset allocation category.
According to the latest retirement fund survey by Absa Consultants & Actuaries over 10 years, the top performer out of 12 portfolios was Allan Gray Balanced with an annual average return of 26.2 percent. The lowest was Stanlib with 13.7 percent.
Over five years, out of 24 portfolios the top performer was the Allan Gray Life Domestic Absolute aggressive portfolio with an annual average of 23 percent and at the bottom was the Stanlib fund with 12.9 percent.
Over one year, out of 26 portfolios, the top performer was the Allan Gray conservative Domestic Stable Fund with a return of 7.5 percent and the bottom performer was (yes, you guessed it) that same Stanlib fund with minus 30.2 percent. Incidentally, Allan Gray was the only asset manager in the survey to provide a positive performance for the past year with both its Domestic Stable Fund and its aggressive Absolute Fund (2.7 percent growth).
Too much leeway
Granted, retirement savings are over the longer term where the returns are better, but the range of results is of concern.
This range of performance can also be put down to the proliferation of what are called broker funds where, in most cases, we have financial advisers putting together unit trust funds of funds, mainly so they can get an extra slice of the cake out of the pockets of investors. A few have professional asset managers doing the investment job, but too many think they are asset managers, which they simply are not. But the Stanlib results show even professional asset managers may not be better than amateurs.
I believe the Financial Services Board issues the licences far too easily and allows financial services companies like Metropolitan, which hosts most of these broker funds - at a fee, of course - too much leeway in increasing the number.
  
 
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