From the end of the month, when the new unit trust classification system opens, you will be able to measure your fund of funds against funds with similar mandates.
This is good news, unit trust companies say. They are confident their funds of funds will live it up in their new categories and will offer you good value in relation to their competitors.
The new system of categorisation will enable you to compare apples with apples, as funds of funds will be reclassified according to their investment mandates, as opposed to the current situation, where they are all lumped together in one category, even though they have very dissimilar mandates.
So management companies that offer funds of funds are confident their funds of funds will continue to offer you value and even more value than before, because of the fact that funds of funds will now compete with other funds in the appropriate categories.
However, Old Mutual Unit Trusts, while noting that the new classification system is very good news for investors and for funds of funds, believes it is still crucial that some manner of identifying a fund of fund exists, as there are several additional dynamics to these funds which you have to consider when you invest.
For example: who makes the asset allocation and fund allocation decisions; does the fund invest only in in-house funds or in other external funds as well; how much will you pay to invest; and how frequently is the fund managed and restructured?
Heidi Dreyer, retail marketing manager at Old Mutual Asset Management (Omam), says the suggestion from the Association of Unit Trusts (AUT) is that these funds be flagged.
Fanie Lategan, Sanlam Unit Trusts chief, says if you are going to look for value in your funds of funds, ensure there is:
* A professional portfolio manager selecting the best funds for you on a continuous basis;
* A portfolio managed according to a fixed mandate which suits your risk profile; and
* Access to a diversified portfolio for investors with small investment amounts.
The new classification system, he says, will make it easier for wrap fund managers and funds of funds to construct meaningful investment style portfolios whether based on balanced, aggressive or conservative styles.
Lategan says Sanlam believes the new classifications are to be welcomed. On a more general level, he says, they provide far greater transparency to the investment objectives of each unit trust.
"Investors will know exactly what they are now getting into," he says.
Fedsure, which has three funds of funds in the top four positions over one year, based on a R1 000 lump sum investment, believes the new unit trust classification system is "extremely favourable and long overdue".
Fedsure's Paul Hutchinson says the Fedsure Flexible Fund of Funds, the top performer in this category over one year, based on a R1 000 lump sum investment, will be classified as a managed flexible fund. Based on the one-year performance figures to June 30, 1999, he says it would also have been the best performer in the managed flexible category.
The Fedsure Balanced Fund of Funds will be classified as a managed prudential fund. Again, Hutchinson says, based on the one-year performance figures to June 30, 1999, it would have been the best performer in that category ahead of the next best managed prudential fund by more than 15 percent.
Hutchinson believes the new unit trust classification system will enable investors to become more aware that "Fedsure's Funds of Funds can not only lower their investment risk, but also substantially outperform conventional unit trust peers".
Andrew Bradley, of Brait management company, agrees that the introduction of the new classifications will force fund managers to adhere to their mandates.
He says the two Brait funds of funds, neither of which have one year performance records yet, will continue to offer you value under the new classification system. Both are multi-manager type funds managed by IPAC, an international specialist manager.
Bradley believes the management process involves continuous research and ongoing monitoring. In fact, Bradley says, this specialist multi-manager approach is the route to follow, now that investors are faced with such a daunting array of choices.
Investors in the RMB Asset Fund of Funds and the RMB Performance Fund of Funds may not exactly be over the moon with the respective three percent and the negative 13 percent returns on these funds over the past year. But Lara Warburton, RMB's executive director of sales and marketing, says RMB's funds of funds boast value through a fairly unique management process, where allocation decisions and fund selection decisions are made using the quantitative and qualitative skills of both RMB Asset Management and RMB Advisory Services.
Under the new system, RMB's Performance Fund of Funds will be classified as a domestic-equity-general fund, the RMB Asset Allocator Fund of Funds will be classified as domestic-asset-allocation-flexible.
The RMB International Equity Fund of Funds offers an opportunity to investors who cannot afford to take money offshore using their individual offshore exchange allowance and will be classified as a foreign-equity-general fund. Investments are made in rands and the funds are then moved offshore via an asset swap, providing a hedge against the rand. The fund will be 95 percent invested offshore at all times, as it is capped at R500 million.
Investors looking for a rand-denominated offshore route may also find value in international funds of funds, for instance, Nibam's multi-managed Universal Opportunities Fund of Funds. This is one of a few international funds which are still open to new investments. It will be reclassified under foreign-general funds.