Over the longer term traditional balanced portfolios have provided respectable returns to their retirement fund clients.
(See "Manager Watch" and "Index Returns" tables).
Over the three years to September 30, all 10 managers in the Alexander Forbes global large manager watch (LMW) produced returns ahead of the 8,5% average inflation, ranging from 12,1% from Metropolitan to 30,9% from Allan Gray.
Even over 12 months, returns look respectable, ranging from 21,4% from Allan Gray to 8,4% from Franklin Templeton NIB (FT NIB). However, not many funds were still invested with FT NIB, which had a paltry R396m in fully discretionary global assets and R403m in domestic assets.
As FT NIB will no longer be looking for institutional clients, Prudential will replace it in the LMW and it has been a stronger performer, returning 16,2%.
But the 12-month returns are flattered by the strong fourth quarter of 2001 as markets bounced back from their lows after the September 11 tragedy.
Returns in the nine months to September are less flattering. The all share index was down 7,1% for the period and the international equity benchmark, the Morgan Stanley Capital International (MSCI) World Index, was down 34,4% in rand. This was partly compensated by a 7,8% return from the all bond index and 8,1% from cash.
In these conditions even stronger managers have seen negative returns, with Old Mutual Asset Managers (OMAM) down 2,1%, Coronation down 3,5% and Stanlib down 4,4%.
Out of 32 balanced managers, only Foord Asset Management, Allan Gray and Oasis produced positive returns and have demonstrated that the right active manager can still produce positive returns in bad market conditions.
Allan Gray had a relatively poor performance from November 2001 to February 2002, as it had no exposure to Anglo American or BHP Billiton, but its overweight position in domestic mid-cap industrials has since paid off. Portfolio manager Arjen Lugtenberg says AVI, Edcon, Foschini, Woolworths, HLH, Murray & Roberts, PPC, Sasol and Tiger Brands were the biggest contributors to performance, along with gold shares.
Lugtenberg says the house has been nibbling on Anglo and the platinum shares and the resources component is up about 10% to 27% of the house's equity positions. However, Lugtenberg says other large rand hedges such as BHP Billiton and Richemont remain too expensive.
A relatively high holding in Richemont was a contributor to Metropolitan Asset Manager's (Metam) disappointing 2002. As a growth manager, Metam, perhaps naively, maintained faith in Dimension Data, Johnnic and Naspers.
Chief investment officer Asief Mohamed says asset allocation added value, particularly internationally, as its foreign equity holding at 40% of foreign assets was well below benchmark, but local stockpicking was poor as the house was less exposed to Sasol and gold shares than its competitors.
But Metam has, nonetheless, lost business only in cases where clients have changed from traditional balanced mandates to low equity or cash.
It continues to win money from multimanagers such as m Cubed, which appreciates Metam's growth style.
Sanlam Investment Management (SIM) has not been so lucky as it has been losing business, particularly from its pooled Impetus funds.
There is hope, however, that the new team, headed by new chief investment officer George Howard, will start to turn performance around.
Howard, who was research head at OMAM, says there was too much consensus decision-making at SIM and he has introduced a system to measure individual contributions to alpha (outperformance).
He says the SIM team was starting to gel, but was disrupted by constant management reshuffles and the change of ownership from Sanlam to Gensec and back again.
Howard will concentrate on achieving alpha. The external communication aspect of the chief investment officer role will be taken by Steve Mills, who will also be responsible for monitoring the implementation of mandates.
Rather than waiting for improved performance , many retirement funds are tempted by absolute return portfolios.
Six of the 11 funds in the Alexander Forbes capital preservation category have produced positive returns in the year to date.
The best were the Prudential Inflation Plus (14,6%) and Stanlib Absolute (10,8%). Both these funds had a heavy exposure to inflation-linked bonds. But even the equity-biased Investec Inflation Opportunities and Coronation Absolute achieved positive returns.
Investec absolute return portfolios head Piet Viljoen says these portfolios need a demanding hurdle rate and his fund aims for inflation plus 8%.
"To achieve this, there has to be a bias towards equities as they have been the asset class that has provided the best real returns over time," he says.
Viljoen is happy to reduce his equity weighting sharply when the market is overvalued and there aren't many counters with growth prospects.
Coronation Absolute portfolio manager Louis Stassen says to achieve absolute returns, his fund seeks to diversify across asset classes. It has a maximum 50% exposure to domestic equities but this is usually the main source of alpha.
The aim is to find stocks and asset classes trading below intrinsic value. Stassen makes more use of derivatives to reduce downside risk than Viljoen.
To add to the confusion, Allan Gray has launched an Absolute fund that is Allan Gray's most extreme house view. It invests in an average of 15 shares and is more aggressive on asset allocation.
At present it sits at an effective 75% in equities, the highest permitted by the Prudential Investment Guidelines, and no bonds. This has been the best performing pension portfolio in the country, with a 34,9% return over 12 months.
There is arguably little scope for multimanagers to add value in absolute return mandates. But Investment Solutions chief investment officer Glenn Silverman says there are so many different absolute return strategies in the market that returns can be more consistent if two or more strategies are combined. In the new Investment Solutions Real Return Focus portfolio, Prescient and OMAM both have an absolute return mandate and they use derivatives to lock-in returns. Prescient uses purely quantitative techniques in its portfolio construction and OMAM uses its actively managed balanced portfolio as the core of the portfolio.
