A guide to balanced funds

Anet Ahern, CEO of PSG Asset Management explained: “A balanced fund is a unit trust that can invest in a range of different assets.  The majority of balanced funds sit in the South Africa- multi asset low, medium and high equity sectors. Currently, these sectors hold approximately 37% of the total assets under management in South African-registered unit trusts.”
 
Investopedia elaborates: “A fund that combines a stock component, a bond component and, sometimes, a money market component, in a single portfolio. Generally, these hybrid funds stick to a relatively fixed mix of stocks and bonds that reflects either a moderate (higher equity component) or conservative (higher fixed-income component) orientation.”
 
A balanced fund as a retirement vehicle
 
According to Ahern, balanced funds make good retirement vehicles as they comply with Regulation 28 of the Pension Funds Act and are limited in the amount of exposure they can have to various asset classes.
 
According to the Financial Services Board (FSB), Regulation 28 prescribes limits for “various types of investment that may be made by a retirement fund.” These act as a guide to funds, stating how much can be invested in equities, property and other investment types.
 
These limitations are:

• No more than 75% may be invested in equities
• No more than 25% may be invested in property
• No more than 90% may be invested in a combination of equities and property
• No more than 5% may be invested in the sponsoring employer
• No more than 15% may be invested in a large capitalisation listed equity, and 10% in any single other equity
• No more than 20% may be invested with any single bank
• No more than 15% may be invested off-shore
• No more than 2, 5% may be invested in “other assets”. “Derivative instruments are not defined, leaving them to fall within this “other assets” category,” revealed the FSB.

Source: FSB.
 
Ahern noted: “Funds that comply with Regulation 28 may have up to 75% of their assets in equities, depending on their mandates. While volatile over the short term, equities have demonstrated the ability to grow the most above inflation over the long term.  In other words, balanced funds with a medium to high equity exposure are long-term investments and thus they are a good match for retirement savings, an endeavour with a long term investment horizon.”
 
She added: “As balanced funds (depending on whether they are low, medium or high equity) can provide investors with the maximum permissible exposure to growth assets over time, they give investors the growth engine they need during the accumulation phase of their retirement saving strategy.”
 
Balanced funds are often available options for retirement funds, preservation funds and living annuities. A preservation fund allows you to retain your investments in a retirement vehicle when you change jobs.. “Investors in these funds can stay invested in the same fund throughout their full saving, preservation and income-drawing cycles,” said Ahern.
 
The advantages of a balanced fund
 
“Balanced funds have a number of advantages for the average investor, and it is for this reason that these funds contain such a large proportion of investors’ savings – whether they are accessed via compulsory retirement products (like pension, provident, preservation or retirement annuity funds) or via direct discretionary investments,” said Ahern.
 
“As funds in the multi asset sectors can invest across a very wide range of asset classes, both in South Africa and beyond our borders, this allows them to provide their investors with a large degree of diversification across many industries, countries, regions, currencies and assets. Because diversification decreases risk, investors in these funds can achieve solid returns at lower levels of risk. In addition, asset allocation is a skill, and a major determinant of investment returns,” explained Ahern.
 
Balanced funds are not subject to Capital Gains Tax (CGT) in respect of purchases and sales made within the unit trust. “As balanced funds have the broadest exposure to the various asset classes, investors are able to gain or reduce exposure to different securities, instruments and currencies without this triggering a CGT event,” added Ahern.
 
The South African Revenues Service (SARS) explained that CGT forms a part of income tax and arises when a person sells an asset with the proceeds exceeding the base cost of the asset.