It was a dismal year for retirement fund managers. The median large manager in SA returned a negative 4,5%; the worst performance since 1974 when funds were down 5%.
Large manager portfolios that invested in domestic assets did slightly better with a median 2,1% return.
See: Manager Watch table
Much of this poor performance is accounted for by weak global markets compounded by the strong rand. International equities were down 43%and international bonds, which returned a satisfactory 16% in dollars, fell 17% in rand.
Absa Consultants & Actuaries director Francois Viljoen says that because of declining international markets and tight exchange controls which did not allow funds to take money offshore last year, the international component in the balanced category has fallen from 19% to 14%, while local equity exposure has increased from 54% to 60%.
Alexander Forbes Asset Consultants MD Wayne Hilton says funds that had very rigid equity-biased asset allocation and do not use tactical asset allocation, would have suffered most. But funds that can manage asset allocation dynamically, as they follow an absolute return mandate, have been able to protect their client portfolios.
The two portfolios best known for their dynamic approach to asset allocation had a satisfactory year. Investec Inflation Opportunity returned 7,6% and Coronation Absolute, 5,3%. This was still below the best performers in the capital preservation sector, Prudential Inflation Plus (17,0%) and Stanlib Absolute (12,5%), which benefited from last year's repricing of inflation-linked bonds. Prudential Portfolio Managers MD Graham Mason says the nominal returns from the portfolio might not be as strong this year but it is still likely to meet its target of inflation plus 6% over three years.
The capital preservation funds had a wide range of asset allocations, from OMAM Profile Capital with just 16% in local equities, to 71% in Investec Inflation Opportunity.
Hilton says several pressures, apart from performance, are encouraging fund trustees to look more closely at absolute return funds. Under the surplus legislation, companies will not be able to build up surpluses in their defined benefit funds as these will have to be distributed, but they will have to continue funding deficits. This will encourage them to look for lower volatility and more stable returns. There will also be pressure from the accounting rule AC116 which makes companies take fund deficits through their income statement.
The danger, however, is that there is an opportunity cost in absolute returns when equity markets recover. Balanced portfolios are well placed to benefit from a recovery in the JSE Securities Exchange, as even the most cautious managers, Stanlib and RMB, hold about 61% of domestic assets in equities and Allan Gray - which has the best track record overall - has the maximum permitted 75% in equities.
RMB strategy head Richard Simpson says a balanced portfolio provides excellent absolute returns over time.
He says that no asset class has been a clear outperformer over the past 10 years. When equities have done well, it has been on the back of resource shares. Financial and industrial shares have not outperformed since 1995.
RMB was third out of 10 in the Global Manager Watch, in spite of being consistently bearish on bonds. It ended the year with 14% in bonds and 24% in cash in its domestic only balanced portfolios. Simpson says that with the current inverted yield curve there are better yields on cash than bonds without the capital risk.
RMB, with 12,9%, had one of the lowest allocations to international assets in its global portfolios among the large managers, along with OMAM (11,6%) and BoE (11,8%). It also avoided meltdown by allocating just 38% of its international assets to equity and 10% into a fund of hedge funds, with the rest in bonds and cash.
Stanlib suffered from its high 19,3% weighting in international assets, though a fifth of this was in low volatility hedge funds. It was one of the first asset managers to make full use of its asset swap capacity and, like its peers, it is reluctant to repatriate this so long as it is impossible to move it overseas again.
Stanlib chief investment officer John Koel says that out of its 1,7% underperformance of the median, 1,2% is accounted for by the higher offshore weighting and most of the rest by fewer domestic bonds.
But, he says, local bonds do not look attractive, when SA's inflation differential and sovereign risk is considered.
"And with good shares yielding 5% or even 6%, there's really no contest."
Stanlib's local stock selection was positive primarily because it had a higher position in resources in the first quarter of the year, though this detracted for the balance of the year.
It was a difficult year for Investec, which would have been disappointing news for the large number of investment consultants that support it. Investec business development head Thabo Khojane says the house outperformed its benchmarks by 2%-3%, as it has done consistently over the past seven years, but unfortunately competitors outperformed by 5%-6%.
Investec has given its equities head Gail Boon more freedom to take bigger bets and to make the portfolios more peer group aware. Khojane says the house is happy to open its risk budget as it has been fifth out of 10 over the past 24 months, but the house view portfolios will remain long-term, relatively conservative funds.
Khojane says Investec has performed best in its multiple specialist mandates, which do not appear in the surveys. He says that while value players such as Allan Gray, Oasis, Foord, and Investec's John Biccard have outperformed over the past three years, Investec is well placed to offer a specialist growth equity portfolio under Mark Breedon, who recently moved from Alliance Capital in London.
