When it comes to savings and retirement planning in particular, balanced funds stand out for their simplicity, effectiveness, and ability to weather market storms. These versatile investment vehicles typically combine multiple asset classes in a single portfolio, with the lion’s share invested in equities and bonds. They offer retirees and investors still building their retirement savings a powerful tool to withstand market volatility through the diversity of a multi-asset portfolio, assisting individuals in achieving their financial goals over time.
Pictured: Murray Anderson - Head of Retail at Prescient Investment Management
In South Africa, Regulation 28 of the Pension Funds Act governs retirement investments and provides regulatory support for multi-asset retirement investments. The regulation sets various retirement saving limits for different asset classes, restricting equity exposure to a maximum of 75%, property exposure to a maximum of 25%, and international assets to a ceiling of 45%.
One of the most significant risks retirees face is experiencing poor investment returns in the early retirement years when their portfolio value is at its highest. Drawing income from a fund that experiences a significant drawdown in the early years of retirement can be detrimental to the longevity of the capital sum. Balanced funds help mitigate the potential sequence risk by providing a buffer against equity market downturns via the diversification benefits of the spread of assets it is permitted to hold.
Funds such as the Prescient Balanced Fund demonstrate that they are well-suited for pre- and post-retirement savings. In South Africa, balanced funds have grown from representing just 6% of the unit trust industry assets in 1999 to nearly 35% by the end of Q2 2024. This growth is a testament to a multi-asset fund's ability to meet retirement savers' financial goals.
Balanced funds have also delivered solid long-term performance. While past performance doesn't guarantee future results, this track record demonstrates the potential of multi-asset balanced funds with a high equity exposure to grow retirement savings over time.
A Morningstar study found that balanced portfolios supported the requirement of higher withdrawal rates over 30-year retirement periods, as opposed to all-equity or all-bond portfolios. This means retirees can potentially withdraw more of their income with confidence from their retirement savings without running the risk of their funds running out prematurely.
The power of balance and diversification
Balanced funds confer certain advantages to retirement investors that are not available to investors whose retirement strategy is based on investing in individual single-asset funds. These include:
- Diversification and smoother returns: Balanced funds combine equities and bonds, as well as offshore assets to help reduce overall portfolio volatility therefore generate smoother returns over time. Diversification can be particularly important for retirees who rely solely on their retirement investments for income and who may be more sensitive to market fluctuations.Building multi-asset portfolios, that reap the best rewards rely on sophisticated investment processes from fund managers with proven track records. Prescient Investment Management’s systematic investment process is purpose-built to deliver consistent returns, drawing on data-driven and human insights to make informed, unemotional, repeatable investment decisions.
- Professional investment management: Balanced funds are overseen by experienced and skilled investment professionals who make asset allocation and security selection decisions. The manager's track record is important, so it’s crucial to consider how consistent the fund’s performance has been and whether it has a sufficiently long track record to inspire confidence in its ability to perform during different market conditions.
- Automatic rebalancing: The fund managers adjust the portfolio to maintain the target asset allocation as market conditions change. This eliminates the need for retirees to manually rebalance their investments, saving time and potentially reducing costly errors.
- Flexibility for changing needs: Retirement investment needs shift over time, and balanced funds offer the flexibility to adjust the proportion of stocks versus bonds to match these changing requirements. Investors in the early retirement years may need a greater allocation to stocks to guard against longevity risk. In contrast, retirees in their later years need to prioritise income generation and capital preservation. Balanced funds enable a gradual shift towards more conservative allocations when market conditions dictate, which helps protect retirees' nest eggs while still providing growth opportunities.
- Annual Management Fees: Those funds that deliver the required consistency via a balanced approach must also demonstrate an appropriate pricing structure that is aligned with the client's investment goals.
The bottom line
Balanced funds with a proven track record are well-suited for individuals seeking a comfortable and financially secure retirement. They provide exposure to a diverse portfolio of investments, with equity exposure providing capital growth potential and, due to the diversification across local and offshore assets, the stability one requires over the long term.
As with any investment decision, it's crucial to consider every person’s circumstances and consult a financial advisor. However, for many retirees, balanced funds offer a compelling solution to the challenge of retirement investing and achieving long-term financial goals. At Prescient, we believe our Balanced Fund is an ideal vehicle for consideration.
Disclaimer:
Prescient Investment Management (Pty) Ltd is an authorised Financial Services Provider (FSP 612).
Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. CISs are traded at the ruling price and can engage in scrip lending and borrowing. A schedule of fees, charges and maximum commissions is available on request from the Manager. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. There is no guarantee in respect of capital or returns in a portfolio. Performance has been calculated using net NAV to NAV numbers with income reinvested. Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). For any additional information such as fund prices, fees, brochures, minimum disclosure documents and application forms please visit www.prescient.co.za.
No action should be taken on the basis of this information without first seeking independent professional advice. This document is for information purposes only and does not constitute or form part of any offer to issue or sell or any solicitation of any offer to subscribe for or purchase any particular investment. Opinions expressed in this document may be changed without notice at any time after publication. We therefore disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever that may be suffered as a result of or which may be attributable directly or indirectly to the use of or reliance upon the information. For more information, visit www.prescient.co.za
