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Are balanced funds coming back into fashion?

South African investors have been more conservative, with the majority of flows being “parked” in fixed rate funds in the 5 years to 2020 (Chart 1).

Source: South African Association for Savings and Investments (ASISA). For the period from October 1, 2014 to March 30, 2022. For information purposes only. Past performance is not indicative of future performance.

This trend appeared to reverse as investors became eager to participate in the global equity rally following the COVID-19 stock market crash in early 2020. In late 2021, local equities experienced their first positive net flows on a year since 2017, as local equity markets outperformed their foreign counterparts.

“Parking” money could erode real returns in a high inflation environment

Moving an investment into a low-risk fixed interest fund may provide some level of comfort, but in a high inflation environment, real returns could be eroded and turn negative. The South African Reserve Bank’s (SARB) muted initial inflation response is only now being addressed with a cumulative rate hike of 125 basis points since November 2021.

Another consideration is that market timing is extremely difficult and investors often destroy value trying to do so. Typically, investors tend to reduce risk after a period of poor returns and only reinvest when markets have recouped a significant portion of the losses. Therefore, investors lock in this capital loss by capitulating during heightened uncertainty resulting in further capital erosion.

Balanced funds are better positioned to provide comfort and achieve investment goals

In this climate, balanced funds may present a better opportunity for conservative investors to achieve their investment goals.

Appetite for balanced funds has steadily increased as South African investors seem willing to take on a bit more risk for the potential to outperform inflation over the long term.

Balanced funds offer returns that beat inflation over the long term

This is evidenced by the enduring ability of the PPS Balanced Fund of Funds and the PPS Managed Fund to beat inflation (as a diversified multi-asset portfolio) over the long term, as shown in Chart 2.

Source: Morningstar Direct. For the period from October 1, 2018 to April 30, 2022. For information purposes only. Past performance is not indicative of future performance.

Relative performance

Compared to the larger balanced funds in the South African market, the PPS Balanced Fund of Funds and the PPS Managed Fund have proven to be excellent options.

Money market funds giving negative real returns in the short term

While money market funds may be low risk in terms of volatility, they are showing negative real returns in the short term (as shown in Chart 3), at a time when the PPS Balanced Fund of Funds and PPS Managed Funds are outperforming their respective competitors. landmarks.

Source: Morningstar Direct. For the period from November 30, 2020 to May 28, 2022. For information purposes only. Past performance is not indicative of future performance.

Conclusion

In difficult conditions, resist the temptation to make drastic changes to your investment as the market fluctuates. Trying to time the market by switching between asset classes can erode the value of your investment over time by sealing losses and missing highs. Since a balanced fund typically invests in a diverse mix of asset classes including stocks, bonds and real estate, with a portion of the funds being allocated overseas, these funds are positioned to achieve their investment objectives. fixed in the long term, independently of the evolution of the market in the short term. movements.