Fixed interest funds attract bulk of R29-billion net inflow

28 October 2010 Association for Savings and Investment South Africa (ASISA)
Leon Campher, CEO of the Association for Savings and Investment South Africa (ASISA)

Leon Campher, CEO of the Association for Savings and Investment South Africa (ASISA)

The South African collective investment schemes (CIS) industry attracted net inflows of R29-billion in the third quarter of this year, second only to the R35-billion recorded in quarter two of last year. This brings assets under management by the local CIS industry to a record R868-billion, with all double counting removed. The number of funds on offer at the end of the third quarter stood at 937, also the highest ever.

Releasing the quarterly statistics for the local CIS industry this week, Leon Campher, CEO of the Association for Savings and Investment South Africa (ASISA), says of the R29-billion net inflow, Domestic Fixed Interest funds attracted R20.3-billion.

The statistics show that Domestic Fixed Interest Money Market funds attracted the bulk of the net inflows – investors placed a total of R13.3 billion into these funds. Domestic Fixed Interest Varied Specialist Funds attracted R7.3-billion in net inflows and Domestic Asset Allocation funds took R7.1-billion of the net inflows.

Campher says Domestic Equities had a bad quarter when looking at inflows. These funds managed to attract only a negligible net inflow of R32-million.

Yet the Domestic General Equity sector outperformed the Domestic Fixed Interest and Asset Allocation sectors over the one year as well as over the five years ended September 2010. General equity funds, on average, delivered a return of 17% for the one year and 13% for the five years to the end of September. Money market funds returned 7% for the one year and 9% for the five years. The best performing Domestic Asset Allocation sector over the one year was the Prudential High Equity sector with 14%, and over five years the Domestic Asset Allocation Flexible sector achieved 11%.

The FTSE/JSE All Share Index (ALSI) returned 13.3% in the third quarter alone. However, this growth came off a low base following a bout of volatility at the end of the second quarter, which once again spooked investors and kept them out of equities. The ALSI grew by a total of 21% over the 12 months to end September 2010.

“In Rand terms the ALSI outperformed the S&P500 and FTSE100 by 20% over the 12 months ended 30 September,” notes Campher.

Equities help achieve balanced returns

Campher points out that while equities will always be accompanied by volatility, they do reward with better returns over the longer term. But, says Campher, investing in equities should never be an “all or nothing” approach.

“Equities should form part of a well balanced portfolio that mirrors the investor’s risk profile and takes into consideration the investment objectives,” says Campher.

Unfortunately, says Campher, this is not happening enough. “When we look at historical statistics, we see that there has been little balance for a number of years. For the greater part of the past five years investors have preferred money market funds over equities. This means most investors missed out on a massive equity bull run, which only slowed towards the middle of 2008. The saving grace for many investors was the fact that we were in a high interest rate phase. But this is no longer the case and investors can no longer count on high interest rates to protect them against inflation.”

The graph below shows the flows for general equity funds and money market funds since the beginning of 2005, mapped against the performance of the All Share Index. For the greater part of the strong run in the markets, equities saw negative or negligible inflows.

What does this mean for investors? A R100 000 lump sum general equity investment on 31 December 2004 would have grown to R230 676 by the end of September this year, assuming that all distributions were reinvested. The same amount of money invested in the average Money Market Fund on the same terms would have rendered R160 787.

Campher points out that since the bulk of money was invested in money market funds over this period, the majority of investors would not have benefited from the returns achieved by general equity funds.

(Click on image to enlarge)

Avoiding the all or nothing trap

Campher says the key to smoothing out market volatility is rand cost averaging - the process of investing a fixed amount of money into a unit trust fund every month over a long period.

“By investing the same amount every month, you remove the risk of market timing and you benefit irrespective of whether the equity market is up or down. When it is down your money buys more units and when markets run you benefit from the growth on your accumulated units.”

Campher says the benefit of rand cost averaging over the longer term is best illustrated by the following figures:

  • A lump sum investment into the General Equity sector on 30 September 2007 would have earned a return of 1.4% a year to the end of September this year. A monthly debit order investment started on the same date would have delivered a return of 10.6% a year. The lump sum would have been invested when markets were still running, shortly before the 2008 market crash caused by the global financial crisis – hence the 1.4% return over three years. Had the lump sum been invested two years earlier, it would have participated in an annualized return of 12.82% for the five years. “This makes a strong case, both for long-term investing and rand cost averaging,” says Campher.
  • Over two years the lump sum would have earned 13% a year and the monthly debit order 20% a year.
  • Only over the one year period would both the lump sum and the monthly debit order investments have delivered a 16.8% return, and this by pure chance.

Diversifying offshore

As at 30 September 2010, total assets under management in locally registered foreign funds stood at R103.2-billion, down from the R106.8-billion at the end of the second quarter.

Campher explains that the decline in assets under management for locally registered foreign funds was largely due to the Rand strength.

The number of foreign currency denominated funds on sale in South Africa stood at 348 at the end of September.

Foreign currency unit trust funds are denominated in currencies such as the dollar, pound, euro and yen and are offered by foreign unit trust companies. These funds can only be actively marketed to South African investors if they are registered with the Financial Services Board. Local investors wanting to invest in these funds must comply with Reserve Bank regulations and will be using their foreign capital allowance.

Net inflows amounted to R2.4-billion for the quarter – R1.5-billion into retail investor funds and R900-million into institutional funds.

Campher says 29% of assets invested by South African retail investors in foreign funds were allocated to equity funds. Only 6% of assets were invested in fixed interest funds.

“The irony is that investors are willing to expose their offshore allowance to foreign equity markets, which have performed poorly, especially in Rand terms. But locally they prefer to commit their money to fixed interest funds, ignoring equities, which have done very well.”

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