Investment Focus: Time for Balanced funds?

It is nearly two years since the SARB started raising its benchmark interest rate, which in November 2021 stood at 3.5% and has now risen to 8.25% in the Bank’s efforts to curb inflation. Currently, the global consensus is that most central banks, including South Africa’s, have reached (or nearly reached) their peak rates in the current cycle and that, after a pause of indeterminate length, interest rates will start to come down again once inflation reaches target levels and some economic stimulus is needed. For those who have purposefully invested in interest-bearing investments over this period, it is an important juncture in the cycle, since the outlook for these short-term solutions is no longer as favourable. Eventually, money market yields and bank rates will start falling and re-investment alternatives will be required. So where to from here?

In our view, investors should not be trying to time financial markets in the first place. At M&G Investments, our aim is to build portfolios capable of delivering attractive returns independent of the economic cycle in which we find ourselves. But for those with medium- to longer-term timeframes now facing this question, it may be time to consider multi-asset high-equity (Balanced) funds, which have more favourable prospects for delivering higher risk-adjusted returns over time, due to several factors.

First, balanced funds like the M&G Balanced Fund offer equity exposure, which has greater potential to produce inflation-beating returns over time than cash. Currently, in M&G’s view, SA equities are offering attractive valuations well below their long-term fair value, which indicates that they are likely to deliver above-average returns to investors over time which compensate for the elevated risks.

Secondly, a falling interest rate environment, with subdued inflation, is positive for bond investments. The M&G Balanced Fund, with its overweight in SA government bonds, is well positioned to benefit from this, having added bonds at high real yields that we believe will more than compensate investors for the risks involved over time.

Balanced funds also offer exposure to global equities, property and bonds, which are important in providing diversified sources of returns in uncertain conditions like the present. Not only do they act as a hedge against SA-specific risks, but there have been opportunities to buy into attractive defensive holdings like long-dated US Treasuries, UK gilts and German bunds. These are held in the M&G Balanced Fund, as are select emerging market government bonds (in local currencies likely to strengthen) that are good diversifiers with attractive yields. And the fund’s return potential is lifted by its exposure to a careful selection of global equities chosen using a sophisticated artificial intelligence (AI) process enhanced by the skills of a team of experienced global fund managers.   

So with global and local interest rates not likely to increase much further – if at all – it’s a good time to be considering the alternatives to cash, and balanced funds with their wide diversification are a wise option. In our view the M&G Balanced Fund is holding a very attractively valued array of investments that, based on historic performance, have excellent potential to deliver well-above-average returns for patient investors.