A rookie’s guide to balanced index funds

Okay, before you completely switch off, hear this… a balanced index fund is considered by many investors and financial advisors to be an amazing addition to any investment portfolio. Even if you DON’T have an investment portfolio (yet – for whatever reason), you should definitely have a look at the reasons why it makes sense to consider a balanced index fund.

CN&CO’s Colin Ford spoke to Kingsley Williams (pictured above), chief investment officer at Satrix, to find out a bit more about these incredibly smart financial tools.

CF: Let’s start with the basics. What is an index?

KW: An index, in very simple terms, is a measurement of a chosen segment of a stock market. So, for example, the FTSE/JSE Top 40 index measures the performance of the top 40 shares by market capitalisation on the Johannesburg Stock Exchange.

CF: Can I invest directly in an index?

KW: No. Indices are tracked by what we call index funds, which you can invest in. These are commonly referred to as passive funds. In other words, the shares that make them up and the weighting of the these shares within the funds will be aligned with the index they track. So if you invest in the Satrix Top 40, you’re buying the same shares in the same proportion as those within the FTSE/JSE Top 40 index.

CF: Why would I invest in an index fund, specifically a balanced index fund?

KW: An index fund is a great investment for the long term. It’s not necessarily going to make you rich tomorrow, or even in the next three years. However, because it offers exposure to such a diverse spread of shares, you can expect a good return in the long run, with relatively little risk.

A balanced index fund, also known as a multi-asset fund, goes beyond the stock market. The Satrix Balanced Index Fund, for example, is made up of domestic and international shares, bonds, cash and listed property, which make up the four major asset classes. This spread of risk is what makes balanced index funds so appealing to many investors – particularly newer investors who might feel uncomfortable or overwhelmed when trying to pick a single stock to invest in.

CF: What makes the Satrix Balanced Index Fund unique?

KW: The mix of each asset class is kept fixed to give investors certainty and predictability of what they’re investing in. This is known as the strategic asset allocation of the fund, and every six months we rebalance the portfolio back to this mix. The domestic equity component of our balanced fund – which makes up 55% of the weighting – is itself split into a number of component index funds. We call it the “SmartCore™” component. It offers exposure to the Satrix Momentum Index, the Satrix Stable Dividend Index and the S&P Quality South Africa Index. We periodically review the composition of both our strategic asset allocation and the SmartCore™ to ensure it is optimally designed to deliver long-term growth to investors.

CF: So how do I buy in?

KW: Anyone can invest in the Satrix Balanced Index Fund simply by opening an account with SatrixNOW – our low-cost investment platform with no minimums and extremely low investment costs. You can invest as much or as little as you like. If you have R20 or R20 000, it’s all good. The fund is also available as part of the Satrix Access range. (For more information on this option, you’ll need to speak to your financial advisor.)

CF: What about a tax-free option

KW: You have the option to buy any Satrix products tax-free, including the Satrix Balanced Fund, at no extra cost. Just be careful not to exceed the maximums permitted by National Treasury – currently R33 000 per year, with a lifetime limit of R500 000.

CF: What are the fees associated with the Satrix Balanced Index Fund?

KW: You can buy the Satrix Balanced Index Fund through SatrixNOW with no upfront costs and an annual management fee of 0.40%. The Total Expense Ratio is currently 0.66% (as of June 2018). Alternatively, the fund can be purchased through your investment platform (also known as a LISP) at an annual management fee of 0.29%.

CF: <logs on to SatrixNOW and buys a few rands’ worth of Satrix Balanced Index Fund via his tax-free account>

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Please read the legal stuff…
The information does not constitute financial advice. While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSPs, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information. Consult your financial advisor before making an investment decision.

Satrix Managers (RF) (Pty) Ltd (Satrix) a registered and approved Manager in Collective Investment Schemes in Securities and an authorised financial services provider in terms of the FAIS. Collective investment schemes are generally medium- to long-term investments. Unit Trusts and ETFs the investor essentially owns a “proportionate share” (in proportion to the participatory interest held in the fund) of the underlying investments held by the fund. With Unit Trusts, the investor holds participatory units issued by the fund while in the case of an ETF, the participatory interest, while issued by the fund, comprises a listed security traded on the stock exchange. ETFs are index tracking funds, registered as a Collective Investment and can be traded by any stockbroker on the stock exchange or via Investment Plans and online trading platforms. ETFs may incur additional costs due to it being listed on the JSE. Past performance is not necessarily a guide to future performance and the value of investments / units may go up or down. A schedule of fees and charges, and maximum commissions are available on the Minimum Disclosure Document or upon request from the Manager. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Should the respective portfolio engage in scrip lending, the utility percentage and related counterparties can be viewed on the ETF Minimum Disclosure Document. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The index, the applicable tracking error and the portfolio performance relative to the index can be viewed on the ETF Minimum Disclosure Document and/or on the Satrix website.

International investments or investments in foreign securities could be accompanied by additional risks such as potential constraints on liquidity and repatriation of funds, macroeconomic risk, political risk, foreign exchange risk, tax risk, settlement risk as well as potential limitations on the availability of market information.

Performance is based on NAV to NAV calculations of the portfolio. Individual performance may differ to that of the portfolio as a result of initial fees, actual investment date, dividend withholding tax and income reinvestment date. The reinvestment of income is calculated based on actual distributed amount and factors such as payment date and reinvestment date must be considered.