Staying with the theme of South African unit trust funds, in this week’s edition we explore the ASISA (Association for Savings and Investment SA) category: South African Low Equity funds, generally better known as ‘stable funds’.

What type of assets do these fund managers include in their portfolios? What are the costs related to investing? What are the risks involved and what potential earnings can you expect? We will set out some of the basics so you’ll be more informed whenever you look at a fund’s fund fact sheet (so-called ‘minimum disclosure document’), or are speaking to an investment adviser.

What is a stable fund?

Stable funds can invest in a mix of debt securities, money market instruments, bonds, inflation-linked securities, listed equities and property, preference shares and other high-yielding securities and derivatives. Stable funds may only hold up to a maximum of 40% in listed equities, and operate within the constraints of Regulation 28 of the Pension Funds Act (which makes them suitable for retirement products). 

Investment objectives are typically intended to achieve moderate capital appreciation and generate performance returns in the region of inflation (CPI) plus 3% over rolling, three-year periods, with low volatility and low correlation to equity markets through all market cycles.

Is a stable fund suitable for your risk profile and investment objectives/needs?

Stable funds are positioned in the lower to middle range of the risk/reward spectrum, implying the probability of market fluctuations, albeit at lower volatility. The risk of short-term monetary loss is therefore low to medium. Due to the composition of these funds, they are exposed to market risk, as described above, as well as default and interest rate risks. 

Interest rate risk is the risk that the value of fixed income investments tends to decrease when interest rates rise. Default risk is where the issuers of fixed income instruments may not be able to meet interest or capital repayments. Property shares may also be included in the portfolio and can carry the same risk as investing directly in real estate, which is subject to local economic conditions and interest rate fluctuations. A portion of the fund may also be invested in assets outside South Africa and carry the same underlying risks as SA securities, in addition to currency, international geopolitical and economic risks. 

Stable funds are suitable for investors who:

  • have a low to medium risk appetite, but require capital growth in real terms
  • have a medium-term investment horizon of at least three years and longer

How do I select an appropriate fund manager?

There are more than 150 funds in the ASISA MA Low Equity category. It therefore remains a challenge to select a fund or fund manager, even if you have already identified a stable fund(s) as an appropriate investment vehicle. Firstly, it is important to ensure that the company or manager is an approved financial services provider (FSP), registered with the Financial Services Conduct Authority (FSCA). A reputable and well-known service provider should be able to assist and you should seek the advice of a registered, experienced financial adviser who specialises in investments. 

Depending on the size and nature of the investment, it is important to know that, with the advent of investment platforms (linked investment service providers or LISPs), it is possible to invest in more than one fund and/or fund manager via a single investment company. This is especially helpful when it comes to enjoying the benefits of diversification and consolidation. Fund managers have different investment philosophies and styles, so by combining funds with a low correlation, for example, it is possible to create a portfolio that delivers more stable returns in varying market conditions.

What fees will you pay?

All fees must be clearly stated on the fund’s minimum disclosure document (fund fact sheet). Make sure you understand the fund’s total investment costs (TIC). Fees can typically be divided into four categories: administration charges, investment management charges, advice charges and transaction costs. 

Management fees can also be separated into fixed and performance-based fees.  A fixed fee does not vary, regardless of the performance of the fund. A performance-based fee means the management fee is linked to the fund performance. In periods of underperformance the fee will typically be reduced, and in periods of good or strong outperformance of the benchmark, the fee will increase. Performance-based fees normally have maximum limits, to avoid excessive fees in periods of superior fund returns.

NOTE: The information in this article does not constitute financial, tax, legal or investment advice and the companies in the PSG Konsult Group do not guarantee its appropriateness or potential value. As individual needs and risk profiles differ, we recommend that you consult your qualified financial adviser if need be. PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider. FSP 728.

Theo Cloete is a wealth manager at PSG Wealth Hermanus

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