Multi-asset funds are some of the largest in South Africa, with funds under management in the tens or even hundreds of billions of rand. These balanced funds are a mainstay for many investors.
Some investors prefer to build their own balanced fund, allowing them to tweak the asset allocation to their liking rather than following the investment manager’s approach.
This DIY path offers the flexibility of not being constrained by regulation 28 prudential limits.
Before building our balanced fund, we must determine our broad asset allocation across equities, bonds, cash, property and alternatives. From there we work out the desired split between domestic and foreign assets in each class. IM will use the following asset allocation:
Domestic equity: 35%
Foreign equity: 30%
Domestic bonds: 10%
Foreign bonds: 5%
Domestic cash: 5%
Foreign cash: 0%
Domestic property: 7.5%
Foreign property: 2.5%
Alternatives: 5%
Total: 100%
Domestic equity: Most people are using balanced funds as long-term holdings to build or supplement a retirement nest egg and have rand-based liabilities, so it makes sense to invest in equities listed on the JSE to generate rand-based income and capital growth. The JSE Top 40 serves as the reference index for the South African equity market, with multiple derivations of the main index, including equally weighted, shareholder-weighted and factor-based versions such as dividend yield, value or quality.
IM would select the Satrix Alsi index fund because it provides exposure to 99% of the JSE, while giving a spread across a range of market capitalisations. Fees: 0.55%.
Foreign equity: Given the historical weakness of the rand and the lack of specific industry sectors listed on the JSE, we need to add foreign equity to our portfolio. IM is mindful of the concentration of US equities within global equities and wants a broad spread of international equities.
IM would pick the 10X Total World Stock Feeder ETF. This offers a mix of developed and emerging market equities and provides the opportunity to benefit from other international equity markets if the cycle turns and US equities underperform.
Fees: 0.27%
Domestic bonds: Given the high yields from South African government debt, which carries over into corporate bonds, this asset class churns out a nice stream of income and is a partial shock absorber to equity market volatility over time.
IM is going for the Sygnia Enhanced All Bond Fund which combines South African government and corporate debt. The fees are reasonable at 0.43%.
Domestic cash: Given the higher risk and interest rate sensitivity associated with bond prices, it is prudent to allocate some assets to pure cash or short-dated debt.
Given the interest rate environment in South Africa, cash offers a decent return for the risk taken. IM selects the Sygnia Money Market Fund Unit Trust Class A. Fees: 0.31%.
Foreign bonds: After 15 years of near-zero and negative interest rates on international bonds, their yields now are reasonable, with US bonds offering about 4%.
The foreign income and asset exposure gives a rand hedge. IM prefers diversification and would opt for something that gives it a spread of currencies and issuers, both governments and corporates.
IM chooses the Satrix Global Aggregate Bond Feeder ETF. Fees: 0.42%.
Domestic property: This has had a good run over the past 18 months after a few years in the doldrums. With a strong income-generating focus, it will also serve as a stabiliser during equity market volatility.
What’s needed is a spread across the Reits listed on the JSE, so IM would opt for the Satrix Property ETF. Fees: 0.33%.
Foreign property: The Sygnia Itrix Global Property ETF offers exposure to the world’s largest Reits, all of which possess extensive global property assets, providing additional foreign income and a rand hedge. Fees: 0.27%.
Alternatives: IM would suggest gold. Given its performance over the short, medium and long term in dollars and rand, coupled with its low correlation to all the other asset classes in IM’s DIY balanced fund, it should help smooth out the ups and downs.
IM chooses the long-established 1nvest Gold ETF, which is backed by physical gold and carries a fee of 0.25%.
The weighted average fee for this DIY balanced fund comes in at a respectable 0.4%. Use it … don’t use it.
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