Intermediaries driving CIS industry sales
Investor confidence is booming, according to the Association for Savings and Investment South Africa (ASISA). It is this confidence that has resulted in the second highest ever net quarterly inflows for the Collective Investment Schemes (CIS) industry dur
Why the high confidence levels? “We were also surprised, but we believe it shows that investors have confidence in the products,” says Peter Blohm, senior policy advisor at ASISA. “The new classification has possibly helped investors to understand the products better – we wanted to remove any kind of classification based on style, because what often happens is that product developers come to market with new ideas but these can be confusing. We wanted to make classification straightforward and indicate clearly where assets are held.”
Intermediaries may find it difficult to differentiate between funds, particularly with regard to SA Equity – General, which is a large category, but Blohm says this puts the onus on the advisor to do the necessary homework before making recommendations.
Last year’s figures may have been somewhat lower, but this isn’t a reflection on the CIS industry itself, because changes were largely driven by tax matters. The R719m that came in during the first quarter last year wasn’t as significant, but the story here is that Dividend Income Funds were taxed as interest rather than dividends and this caused a bit of a dash out of these funds. This was the norm for both money market funds and specialist funds at that time.
Assets under management have doubled over five years
Figures show that the (CIS) industry’s assets under management have almost doubled over the past five years – as at the end of March assets under management totalled R1.28 trillion and investors could choose from 988 funds. Net inflows in the first quarter of this year came either directly from investors (27%) or through intermediaries (35%), which means that more than 60% consists of retail money.
Five years ago the figures were slightly different, when investments made via intermediaries and direct investments both accounted for 32% of the inflows.
“There appears to be a trend here, with more business coming via intermediaries,” says Blohm. “The reason why the South African Multi Asset category (previously Domestic Asset Allocation) appears to be so popular is that intermediaries can give investors access to all asset classes within one fund, removing the need for them to have to focus on asset allocation.”
SA Multi Asset inflows in the first quarter accounted for R26.2bn, which is 44% of total industry assets, excluding Worldwide, Global and Regional sectors. The SA Multi Asset category is made up of the following sub-categories: the new Income sub-category, Low Equity, Medium Equity, High Equity (previously Prudential Variable Equity), and Flexible. Only 25% of assets were invested in pure equity and real estate funds at the end of March.
This year, linked investment services providers (Lisps) generated 21% of sales (the same as five years ago), while 17% of sales was received from institutional investors like pension and provident funds (slightly up from the 15% five years ago).
Relooking capital requirements
There are still “a few too many” funds, says Blohm – there are currently 988 funds with managed assets totalling R1.28 trillion. “We are perhaps more concerned with the fact that there are so many fund-of-funds, which are often linked to particular marketing organisations,” he says. “We have set up a work-group with the FSB to re-look capital requirements for collective scheme managers, which may see some changes down the line. It’s been 10 years since the Collective Investment Schemes Control Act (CISCA) was set up and it hasn’t been revised since.”
Blohm says there are three ‘pillars’ of CISCA that could be revised – seed capital, position risk capital and operational expenses.
Investment managers are currently required to have R1m seed capital available but it may be that this will be revised to a more appropriate level, requiring a bigger stake, which would make it tougher for less-than-serious players to enter the industry.
In terms of position risk capital, managers need to hold additional capital to invest in their own portfolios – the percentages are 10% for money market, 15% for fixed interest and 25% for other portfolios. But Blohm argues that because managers frequently use money market funds to manage cash in clients’ portfolios it seems unfair that if they disinvest from their unit trusts they can use highly liquid assets to meet their requirements; this would disadvantage other investors.
In terms of operational expenses, CISCA requires that managers hold 13 weeks’ worth of these expenses, or a minimum of R600 000. But as it would require a minimum of R1.5m operating capital to set up a management company, this figure also needs to be revised. These revisions could well lead to increases in capital requirements.
Editor’s thoughts:
There are more inflows into money market than last year, but this may be due to the fact that institutional investors are managing the cash portions of their portfolios. Regardless of whether we include money markets or not, 80% of the funds under management are held by the top 10 managers in the industry, which shows that long track records are attracting the money, even though this is no predictor of future performance, says Blohm. Also of interest is the fact that the largest fund is no longer a money market fund, but the Allan Gray Balanced Fund. What are your thoughts on these statistics? Comment below or email fiona@fanews.co.za.
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