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31 August 2004 Angelo Coppola

The segment that has recently lagged inflation (after-tax returns from the money-market funds) still dominates.

The segment with the best recent record – local equities – remains the poor relation.

The “perversity of recent numbers” has prompted STANLIB, to launch an education drive to alert risk-averse investors to capital-protected, equity-based alternatives to the money-market.

Says Sean Segar, head of Product Development at STANLIB: “The market correction in the year, leading up to Easter 2003, which saw about one third of the value of the JSE Securities exchange wiped out – scared off many equity investors.

The tide turned in the 12 months to Easter 2004 when some local equity funds recorded gains of 50%-plus. Yet the flight to money market ‘safety’ continued.

Figures from ACI (Association of Collective Investments), at the 31st March 2004, show that money market products account for 38(%) of the local collective investment scheme market or R85 billion in hard cash.

Gross sales of the Money Market Funds in the first quarter of 2004 were 68% of total industry flows.

Domestic Equity-based products – once kings of the market – now account for just 27(%). “It’s a mismatch. The numbers look perverse, yet in a strange way it’s understandable,” says Segar.

He points to several factors keeping investors on the sidelines:

  • The feeling among some cash-focused investors that they missed the big equity upsurge and it’s no use chasing last year’s opportunity.
  • Nervousness stemming from political factors like Iraq and the war on terror.
  • The surge in oil prices and memories of the slump during the last oil crisis in the late ‘70s.
  • Belief that interest rates will rise as oil-fired inflation sets in, creating improved yields in a safe haven like the money market.
  • Having been burned by volatile equities – “once bitten, twice shy”.

In previous market cycles this would keep any risk-conscious investor out the market. The difference is that in the last year a new generation of equity-based investments was introduced by wealth product developers.

"Over-commitment to the money market is a short-term, defensive strategy. After-tax the returns could be as low as 4%. By staying too long in defensive mode you could hurt your prospects of long-term capital growth.

This can be disastrous if you’re planning on a comfortable retirement in 10 or 20 years.

Health warning: remember to get the professional to advise you and your clients. This article should not construed to be advice.

Quick Polls

QUESTION

The second draft amendments to Regulation 28 will allow retirement funds to allocate up to 45% of their assets to SA infrastructure, with a further 10% for rest of Africa; but the equity & offshore caps remain unchanged. What are your thoughts on the proposal?

ANSWER

Infrastructure? You mean cash returns with higher risk!?!
Infrastructure cap is way too high
Offshore limit still needs to be raised
Who cares… Reg 28 does not apply to discretionary savings
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