Investors go multi-asset-everything as 2022 equity returns fizzle
The flow of funds into, out of and through South Africa’s collective investment schemes (CIS) industry offers many ‘tells’ about investor behaviours and sentiments. For this reason, the quarterly CIS statistics published by the Association for Savings and Investment South Africa (ASISA) always make for interesting reading. Unfortunately, the first observation that can be drawn from the 30 September 2022 numbers is that financial market returns have, on average, been rather lacklustre of late. Why do we say that?
Loads ploughed in, yet AUM virtually unchanged
In a nutshell, despite billions of rand in ‘fresh’ capital flowing into the CIS universe over the last 9-months, the total assets under management (AUM) remained flat at just over ZAR3 trillion. And although the total was slightly improved from ZAR2.98 trillion in the second quarter of 2022, it remained short of the closing total for 2021, being ZAR3.14 trillion. According to ASISA, the local CIS industry attracted healthy net inflows of ZAR39 billion in the third quarter of this year, bringing total net inflows for the 12 months to the end of September 2022 to ZAR121 billion. This was the strongest quarterly inflow reported by the industry since the fourth quarter of 2020, when ZAR44 billion flowed in.
These healthy net inflows, which are made up of new investments plus dividends reinvested, occurred despite a volatile trading environment. “After a strong but brief rally in July this year, stock markets in most jurisdictions, including South Africa, declined sharply, mainly due to global inflation fears and slowing global growth,” noted Sunette Mulder, ASISA Senior Policy Advisor, in a press releases announcing the latest statistics. For the year ended 30 September 2022, the JSE All Share Index managed a dismal 3.5% return, the US S&P500 a 1% return and the UK FTSE 100, a negative return of 0.2%, all in rand.
Investors stick with multi-asset diversification
Against this backdrop, investors continued to favour the South African Multi Asset category, which offers broad diversification across asset classes such as bonds, cash, equities and property. ASISA lists 774 funds in this category, which accounts for 49% of total industry assets. Local financial and investment advisers are able to accommodate a range of client risk profiles in this category, from the relatively conservative SA Multi Asset Income funds to more aggressive SA Multi Asset High Equity funds. Mulder noted that the SA Multi Asset category benefitted from ZAR66 billion in net inflows over the year to 30 September 2022, with ZAR26.1 billion to the income side, and ZAR23.6 billion to high equity.
Local retail investors seem content to leave tough asset allocation decision making to the experts, and for the most part appear to have done exactly that during 2022. By way of example, the SA Equity category, which is perceived as higher risk, only saw net inflows totalling ZAR2 billion for the year to end-September. The same cannot be said for near cash or ultra-conservative categories like SA Interest Bearing funds, which recorded net inflows of ZAR26 billion; and SA Money Market funds, which attracted net inflows of ZAR5 billion. The sense this writer got from various asset manager presentation during October and November of this year, is that although SA equities offer value, one can get adequate exposure to the class from a balanced or multi-asset fund.
Going offshore without leaving our shores
The 623 foreign currency denominated, locally registered funds that submit information to ASISA held assets of ZAR665 billion at the end of September 2022, up from the ZAR638 billion held at the end of the second quarter of 2022. It is worth noting, however that the net inflows to this category are slightly slower than the flows to local CIS industry, totalling ZAR24.8 billion for the last 12-months. By this writer’s reckoning, this represents 3.7% of net inflows as a percentage of AUM in the offshore category. By contrast, there were around 4% of net inflows as a percentage of AUM across all local CIS portfolios over the same period.
We found this result surprising, given the apparent preference for offshore over onshore that often emerges at asset manager ‘talk shops’; but must conclude that the sharp sell-off in United States (US) and other developed market equities since November 2021 has muddied the water, in this case sending local investors scurrying for the apparent safety of SA Multi Asset. These unit trust portfolios are denominated in currencies such as the dollar, pound, euro and yen and are offered by foreign unit trust companies to local investors. ASISA reminded readers that such portfolios could only be actively marketed to South African investors “if registered with the Financial Sector Conduct Authority (FSCA)” and that “local investors wanting to invest in such portfolios had to comply with Reserve Bank regulations and will be using their foreign capital allowance”.
Local can still be lekker!
To add some flavour to today’s CIS-focused newsletter, we share two ‘gems’ from a recent Old Mutual Investment Group (OMIG) presentation, both offered up by Jason Swartz, an Investment Strategist at the asset manager. The first, which offers some offshore asset allocation flavour, was a clear warning not to be lured into global equities too early, especially given the outlook for global bonds. And the second, was that South African asset classes were likely to deliver strong returns in 2023. OMIG expected local equities to “play catch-up next year on valuation support and headwinds fading”.
Swarts said that South African equity valuations were cheap, with far less earnings uncertainty than that exhibiting in the United Kingdom (UK) and US markets and that local bonds offered great risk-adjusted real returns. This positive outlook does not, however, mean throwing caution to the wind and going ‘all in’ on the South African Multi Asset category. According to Swarts, their current positioning is “cautious, but not outright defensive” while the asset manager’s overweight exposure to local assets is de-risked using currency hedges. Overall, the firm is neutral equity, with a preference for local equity over offshore. “On a cyclical 12-to-18-months view, we are looking to be more constructive on growth and SA assets as policy shifts to easier conditions,” he concluded.
Writer’s thoughts:
Asset managers often warn investors of the danger in trying to predict or time equity market tops and bottoms; but it can be just as difficult to ‘call’ the turning point in interest rate cycles. As 2022 draws to a close, many asset managers are shifting into domestic and offshore bonds in the hope that the interest rate cycle has almost ‘topped’. Do you think they have the timing right, or will central banks hike rates further into 2023 than expected? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
