Picture: THINKSTOCK
Picture: THINKSTOCK

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ONE of the simpler approaches to investing, particularly given a medium to long-term investment horizon, is arguably the balanced fund method, which is considered to be a profitable choice as well.

According to Allan Gray, over the five years to the end of 2012, the approximately 800 South African unit trusts — excluding money market funds and considered as a whole — delivered average "money-weighted" returns after fees of almost 2% ahead of inflation.

"This sounds good, but is no more than the returns of money market funds over the same period," says Rob Dower, Allan Gray’s chief operating officer. "At the same time, investment risk pooled across all of these funds was similar to that of a balanced fund. Investors who invested in balanced funds did almost a full percent better."

He says that in conducting the same analysis over three years, investors in the average balanced fund beat the average all-unit-trusts investor by about 2.5%. "Simplicity, it seems, pays off," Mr Dower insists.

He adds that through the ability to diversify investments across a range of asset classes, a good balanced fund reduces risk. "By choosing a balanced fund, investors elect to leave the asset allocation decisions to their fund manager. Comfortable in the knowledge that their experienced fund manager is making appropriate decisions on their behalf, balance fund investors should, theoretically, switch less often and improve their chances of enjoying the same returns as their fund."

Mr Dower says that balanced funds that are compliant with regulation 28 of the Pensions Fund Act simplify investors’ lives by ensuring their retirement savings remain within the limits the regulation sets out for each asset class. They also provide a way to obtain exposure to offshore investments. Under regulation 28, balanced funds can invest up to 25% of their portfolio offshore and a further 5% into African investments.

Mr Dower notes that as part of its drive to reform retirement savings, Treasury is proposing a mechanism for retirement fund trustees to nudge members towards prequalified default choices — such as regulation 28-compliant balanced funds — a proposal which, he says, has the potential to reduce the negative impact of too much choice without reducing competition.