Celebrating 10 years of market-leading rules-based investing

By Jannie Leach

The Nedgroup Investments Core Diversified Fund celebrated its 10th anniversary on the 31st of August 2019.

It was the first multi-asset rules-based (passive) unit trust fund launched in South Africa and set the course for the Nedgroup Investments Core Guarded, Nedgroup Investments Core Global (UCITS), Nedgroup Investments Core Global Feeder and Nedgroup Investments Core Accelerated Funds that were launched over the following years.

The Nedgroup Investments Core Diversified Fund built up an enviable track record over the past 10 years and received the 2015 Morningstar award for the best risk-adjusted performance in the Aggressive Allocation category. It was also the runner up in 2018, illustrating the consistency of the fund’s performance. During August 2018 it became the largest rules-based fund in South Africa when it crossed the R10 billion mark. Currently, the fund size is nearly R15 billion making it the 10th largest balanced fund (SA Multi-Asset High Equity category) in South Africa.

The Nedgroup Investments Core Diversified Fund is not the only fund that has enjoyed success in the Core Range. The Nedgroup Investments Core Guarded Fund will reach its 10-year milestone in January 2020 and with over R6 billion in assets making it the 9th largest conservative balanced fund (SA Multi-Asset Low Equity category) in South Africa.

The combined Assets Under Management (AUM) of the Core range recently went past R30 billion[1] , which is around 13 times higher than 5 years ago! This stellar growth would not have been possible without the broad support from clients and partners. There are currently over 2000 financial advisors and over 100 participating employers using the Core Range as investment solutions for their clients/members.
The success of the Core range over the past 10 years can be attributed to a few key features, namely portfolio design, consistent performance and low overall costs.

Designed with reliability in mind

The Core range was designed with a clear goal in mind – to maximise investors’ probability of successfully meeting their target return over appropriate time frames. To achieve this goal, we need incorporate three important elements into the design of the portfolios:

• Investor behaviour – Investors can be their own worst enemies as they often invest in funds that have recently delivered the best performance and withdraw money from a poorer performing fund. If they do this frequently they incur the investor behaviour penalty which results in them earning lower returns than the funds they invested in over their investment horizon. The Core range was designed to mitigate this risk by not promising outperformance based on picking the next big winner – whether it be shares or asset classes. In so doing the Core funds offer investors simplicity and transparency as they follow pre-defined rules that determine the asset allocation, underlying asset classes and benchmark selection.

• Implementation – One of the main benefits of rules-based investing is its low overall costs, mainly due to much lower asset management fees and transactions costs. Over time, these costs savings compound and have a meaningful impact on savings growth. The Core range was designed to be implemented in a cost and tax efficient manner by reducing portfolio turnover which results in lower brokerage fees and Securities Transfer Taxes (STT).

• Risk management – An important consideration in achieving the investment goal of a portfolio, is the risks taken by investors and the time required to navigate them.  There are two types of risks to consider; the risk of a permanent loss of capital and the risk of losing purchasing power. The risk of a permanent loss of capital is mitigated by diversification – across and within asset classes. Furthermore, by imposing a cap on the weighting of any single security we can mitigate this risk even further. The risk of losing purchasing power is managed by using the right mix of growth assets such as equity and listed property. The Core range offers broader diversification than any of its peers as it invests across five domestic and five global asset classes (equity, listed property, bonds inflation-linked bonds and cash).  Each portfolio holds around 170 South African shares and over 200 South African fixed income instruments. On the global side (Core Global Fund) they hold nearly 3000 shares and 8000 fixed income instruments.

In the table below, we show how these three considerations impacted the decisions between using strategic or tactical asset allocation and mark cap versus smart-beta asset class benchmarks. Tactical asset allocation involves market timing which increases the portfolio turnover (transaction costs and taxes) and requires liquidity which reduces the investment universe (e.g. no small cap shares or illiquid bonds). Similarly, smart-beta requires additional explanation of out- or underperformance, may have higher transaction costs and not offer the same level of diversification when combined with other asset classes. For that reason, the Core range follows a long term strategic asset allocation with capped market weighted benchmarks.

Consistent performance

The Core Diversified fund has delivered consistent performance versus its peers (Asisa South African Multi-Asset High Equity Category) over different rolling period. It has only been in the third quartile in 12% of the rolling 1-year periods since its inception. The fund has been in the top quartile in nearly all the rolling 5 years periods and has been top quartile over all rolling periods longer than 5 years. This is mainly due to its broad diversification and cost savings of at least 1% per annum. 

This consistent performance trend can be observed across the Core Range as can be seen below. The Core Guarded which is nearing a 10-year track record is currently the 2nd best performing fund in the Asisa South African Multi-Asset Low Equity Category since its inception. The remaining three funds have relatively short track records (less than 5 years) but have delivered solid returns. The Core Accelerated Fund is currently lagging but its mandate is very different to most of the balanced fund peers as it holds between 15% to 20% more risk assets.

Low overall costs

The Core Diversified Fund has an investment management fee including VAT of only 0.40% per annum (B-class).  This leads to a Total Investment Charge (TIC) of just 0.55% which is over 1.2% lower than the average balanced fund.  The additional costs in the TIC are made up of 0.10% in transaction costs and 0.05% in unit trust costs and the underlying offshore investment holdings’ TICs.

The Core Diversified Fund has clearly ‘delivered what is on the tin’ by producing consistent fund performance with better investor outcomes as can be seen in the graph below. The combination of lower cost and the investor-focused design has led to better outcomes for investors even when compared to the large funds managed by the known brands.

[1] 20th of September 2019