Analysing balanced funds vs flexible funds' performance : the impact of pension fund investing restrictions

Abstract

Presently the South African government through National Treasure is busy re-evaluating the pension fund industry. One of the most recent legislation changes were on 1 July 2011 when the revised version of Regulation 28 took effect. In the new version asset allocation limitations are applied to individual investors. Previously it was the responsibility of the pension fund provider (administrator) to comply with asset allocation limitations. The majority of investors and pension providers do not have the time or the knowledge to manage investments asset allocation according to limitations. Limitations that were imposed was on equity, property and foreign assets. This responsibility for providing compliant funds rest with the administrators and collective investment schemes. The aim of this study is to determine if Regulation 28 compliant funds selected by individuals do indeed outperform funds that do not comply. In analysing the effect of Regulation 28 multi asset balanced funds that are compliant, was selected versus non-compliant multi asset flexible funds. Relevant literature study on the pension industry and empirical research on funds was discussed and brought in to context with objective of study. The five largest funds in each category was selected through an extensive study in order to address key issues to determine if limited asset allocation has an effect on performance. Relevant investment analysis methods were used to determine risk, reward, performance and asset allocation. A comparison of the different funds provided a clear evidence with regard to outperformance. The results obtained from the analysis were used to recommend efficient funds for long-term savings in the South African pension fund industry. Flexible funds with their asset selection exhibits a greater performance than balanced funds.