Why are there different kinds of multi-asset funds?

Multi-asset asset funds invest in more than one asset class and these are some of South Africa’s most popular funds.

These funds started off many years ago as balanced funds and are sometimes still referred to as such because the initial idea was to balance your exposure to riskier shares with some investments in less risky bonds.

The benefits of multi-asset funds are:

Investing across the asset classes gives you the benefits of diversification. If, for example, there is a widespread fall in the price of all shares, losses in the fund may be offset by good, or even flat, returns from bonds and cash.  The returns earned from the different asset classes are said to be largely uncorrelated, meaning there is not much of a relationship between the returns of one asset class and another – the returns are driven by different factors. This means you should benefit from a variety of returns from the different assets in your multi-asset fund, and any falls in the value of one asset should be offset by the holdings in another - giving you a smoother sequence of returns than if you were just invested in shares.

Multi-asset funds now typically include many more asset classes. Depending on its mandate, a multi-asset portfolio can invest in shares, bonds, real estate, cash or gold, both locally and offshore.

Multi-asset fund managers are experts at combining different asset classes as they know the extent to which their returns do or don’t correlate.

The allocations to the different asset classes are constantly adjusted back to what the manager believes is the optimal allocation. This is known as rebalancing. Any gains made during the rebalancing are made within the fund and are liable for capital gains tax.

If you or your adviser do your own allocations between asset classes, picking different unit trust funds in each different asset class, the funds will grow at different rates.  This requires constant rebalancing back to the desired allocation.

Rebalancing between funds could incur a capital gain and, when the annual capital gains tax exemption is exceeded, you will pay capital gains tax. (Read more: How do you pay tax on your collective investment scheme?)

Kinds of multi-asset funds

In the South African multi-asset sector, you will find the following kinds of funds:

• Flexible multi-asset funds
  These funds have no limits on how they allocate to the different asset classes.
  
  Most global, regional and offshore multi-asset funds that are allowed to be marketed in South Africa are flexible funds.

• High equity multi-asset funds
  This is the most popular category of multi-asset funds aimed at investors with longer investment horizons like those saving for retirement. Funds in this category are limited to investing up to 75% of the fund in shares and 25% in listed property.

• Medium equity multi-asset funds
  These funds are intended for more conservative investors and limit their exposure to equities to 60% of the fund and 25% in listed property. These funds should be less volatile – or have more consistent returns than the high equity multi-asset funds.

• Low equity multi-asset funds
  These funds are intended for very conservative investors – such as those approaching retirement or drawing an income in retirement – and limit their exposure to equities to 40% of the fund and 25% in listed property.

• Multi-asset income funds
  These funds are suitable for investors looking to earn income from a fund. Managers of these funds allocate to assets earning the highest yields or the best income levels.  These funds take more risk than the funds in the interest-bearing short-term category, as they can invest up to 10% in equities and 25% in listed property.

• Target-dated multi-asset funds
  In these funds, the allocation to shares, bonds, listed property, cash or other securities changes in line with a target date. As you approach the date on which you will reach your goal, for example, retirement, the allocation to shares reduces. This reduces your investment risk and the potential for you to incur investment losses that you do not have time to recover.

Regulation 28 

The Pension Funds Act requires retirement fund investments to conform with certain investment limits to ensure retirement savers are protected. These prudential investment guidelines are contained in a regulation – regulation 28 – under the Pension Funds Act.

Many funds in the multi-asset sub-categories, with the exception of the flexible funds, conform to these guidelines – but be sure to check before you invest – not all of them do.

If you invest through an investment platform, the platform will indicate which funds comply with regulation 28.

The fund fact sheet of every fund will also indicate if it is regulation 28 compliant or not.

Different asset allocation strategies

Managers have different ways of deciding how to allocate your investments to the different asset classes.

Some managers spend a lot of time researching optimal allocations over long periods of time and use the outcome to set their allocation for their fund. This is known as a strategic asset allocation.

Some managers stick rigidly to that allocation regardless of what happens in the market – they have a static asset allocation – while others will move the allocations slightly around what they believe is the best allocation.

There are also managers who believe asset allocations should be managed actively depending on the outlook for the different asset classes. This is known as tactical asset allocation.