The flexible approach to investing

Many fund managers will consider flexible funds to be their shop windows.

In this category there are no constraints on the investment approach. The high equity, medium equity and low equity funds are all subjected to regulation 28 of the Pension Funds Act, which means that there is a 75% ceiling on equities in high equity funds, 60% in medium equity funds and 40% in the low equity category.

The domestic flexible category isn’t wholly unconstrained as it is still subjected to the 45% maximum international assets. But as Peter Brooke of the Old Mutual Investment Group points out, “domestic” is by no means limited to South Africa Inc shares as it includes all shares on the JSE. Some of these have a very limited exposure to the South African economy, such as Prosus, Richemont and British American Tobacco.

I would argue that these businesses aren’t top of their class — many might prefer in an unconstrained portfolio to invest in Alibaba, LVMH or Phillip Morris — but at least they provide “free” offshore exposure on top of the 45% allowance.

Brooke says that most of the exposure in the Old Mutual Flexible Fund, which he runs, is in international markets with a combination of “genuine” offshore exposure and dual-listeds on the JSE, which are considered to be “domestic” by the regulator.

Brooke also runs the Old Mutual Maximum Return Fund in the worldwide flexible category which can be wholly invested in offshore assets — though he will invest in domestic assets when appropriate.

Why not externalise the funds instead of keeping it in a rand-denominated fund? Brooke isn’t licensed to give financial advice, but he can answer in generic terms.

“Many of the clients of this fund aren’t super-rich. They might need access to their funds for emergencies such as an operation, or if they need a new car. It is quite a procedure taking money offshore — which includes tax clearance — and bringing it back.”

There are very few flexible funds internationally, in any case, as the wealth manager, in the UK and US, for example, will typically take charge of both strategic and tactical asset allocation and won’t buy one-stop shop balanced or flexible funds.

Flexible funds come in various shapes and sizes. One of the first big hits in the category was Coronation Optimum Growth, started by the maverick stock picker Walter Aylett, who now runs a fund in the same category called Nedgroup Bravata.

Aylett’s track record shows he is a highly intuitive equity manager in the tradition of Peter Lynch, who had such success with the Fidelity Magellan Fund in the US in the 1980s.

Optimum Growth is still in the Coronation arsenal as an equity-centric fund. The Coronation Market Plus Fund, run by Neville Chester, is also in the worldwide flexible category and it’s more of a genuine multi-asset fund, a souped-up version of Coronation Balanced Plus — Coronation gives quite a few of its funds a “Plus” rating.

But given the strong long-term track record of the Coronation team, Market Plus wouldn’t be a bad place to park your money, but please run this past your adviser.

A very different fund is Foord Flexible, run by the veteran Dave Foord. He has been chief investment officer of Foord Asset Management since the firm was started in 1981. Foord is best known as a top-down fund manager — he rarely talks about his “successful” stock picks and never about 10-baggers (equities in which the share price has grown 10 times since they were purchased.)

He tells IM that what matters to clients is that their savings outperform inflation. As a champion yachtsman, Foord wants to avoid the catastrophic losses that often happen at sea. That could mean holding just 15% or 20% in shares if the markets are overvalued, and theoretically even zero in equities.

“I can feel the pain when our clients lose money,” says Foord.

There is more of a peer group approach in the Foord Balanced Fund, which only in very extreme circumstances would go below 50% in equities. It can lose money but live to fight another day so long as it outperforms the mean of the 10 large managers in the Alexforbes Large Manager Watch — which is not to say Foord doesn’t also feel pain when its Balanced clients lose money.

Do not pay too much attention to past performance, particularly for periods of less than three years, when choosing a flexible fund. Rather be sure that you have the same risk appetite as the fund manager. High-octane funds such as Nedgroup Bravata are unlikely to provide a smooth ride but should provide higher returns than a vanilla equity or balanced fund.

Funds that aim for absolute returns such as Foord Flexible might superficially be much duller, but they add value in the long term as they keep drawdowns low when markets crash. Asset allocation is the largest contributor to returns for investors over time, not the ability to spot 10-baggers, even though this seems much more exciting.