Many Investors drip feed contributions into a balanced Fund provided by a Fund manager. This has become more and more the case since Kiwisaver came on the scene.
So what is a balanced fund anyway? And are they a good idea? How have they weathered the financial storm in recent times?
In it’s simplest form, investment theory for the masses envisages a mixed basket of assets, each of which have a different set of risks, such that the total pool gives diversification and a probable result in keeping with the investors’ feelings, or risk profile.
Assume there were only three model portfolios to choose from; Portfolio 1 (70% fixed interest 30% shares); Portfolio 2 (50% fixed interest and 50% shares); Portfolio 3 (30% Fixed Interest and 70% shares). The majority of investors are going to feel comfortable in one of these, and we will often see these funds described as being a Conservative balanced fund, a Balanced fund, or a balanced Growth fund, just depending on the split of its assets.
Balanced funds operated by the well known Fund managers in NZ are popular and generally of a decent size (at least $100million). So what has been the experience for investors in both the short and long term when committed to such a strategy?
Comparing short term performance is relatively easy. Long term performance is harder because some funds do not have a track record beyond about 15 years, and reporting methods have also changed. The introduction of PIE tax in October 2007, means that performance criteria prior to that point does not compare apples with apples in many cases.
If we generalise, we can say that average returns for the past year for balanced growth funds has been in the order of negative 6%. In the past three years negative 2% pa and in the last 10 years + 4%pa.
Certainly as an investment vehicle they have been far from a disaster in the last few years of upheaval. Their performance during the recent market bounce has been in the order of +6% in the last 6 months, so investors have been treated reasonably well and should be happy with the outcome.
Over the longer term there is only one fund that offers an insight into extended performance. The SIL Balanced Fund, now administered by ING, commenced in May 1959 so has a 50 year track record. It shows a 20 year performance of +6.47 % pa, and a 50 year performance of +11.08% pa. Inflation over that time has averaged 2.5% for 20 years and 6.2% over the longer period. Clearly Balanced funds have something to recommend them.
