As easy as pi trillion in AUM
As the world continues to go mad all around us, with China still insisting on city-wide lockdowns in response to the nth wave of coronavirus and Ukrainian citizens cowering in apartment blocks and subway stations as Russia bombs them, the South African Collective Investment Schemes (CIS) industry has steadily ticked up to R3.14 trillion in assets under management. This, for those among you who took high school science, is also the start of the mathematical ratio pi, 22/7 or 3.14159265359 etc. For further education, pi represents the relationships between a circle’s circumference and its diameter.
The serenity of savings
It seems like forever since this writer reported on something as calm and simple as lump sum or monthly premium discretionary savings, so he has pushed aside the long list of macabre mortality and morbidity statistics that presently flood his email inbox, to focus instead on something more upbeat. You and your clients deserve resounding applause for sticking to your collective guns insofar advising on and investing in unit trusts over the past decades. And yes, dear reader, despite all the marketing efforts, everyone still refer to CIS funds as unit trusts, in much the same way as Jane or Joe Average will talk about brokers or financial advisers at braai time, regardless of what the regulators call you. We should probably stick with short-term over non-life insurance too!
In their latest media release, the Association for Savings and Investment South Africa (ASISA) confirmed that the industry had grown to over R3.14 trillion in assets under management by 31 December 2021, despite rather muted annual net inflows of R56.3 billion. Muted or not, this still represents a significant pot of investor capital which will have continued to growth through Q1 2022 thanks to continued fund inflows and investment returns. Sunette Mulder, senior policy adviser at ASISA, singled out the closure of South Africa’s biggest money market fund in the first half of last year for impacting negatively on 2021 fund flows. The fund held around R80 billion at the time, so it seems a plausible observation.
Why the heck did they do that
For financial advisers, popular questions following the release of these top-line numbers are “what did investors do?” followed almost immediately by “and why the heck did they do it?” The what question is usually easier to answer, because it involves following the flow of funds. It emerged that during 2021, the SA Interest Bearing Variable Term category proved most popular, attracting net inflows of R29.7 billion… Second best, was the Global Equity General category, which netted R24.6 billion. These flows confirm the ongoing tug-of-war between risk-off and risk-on investor sentiment, with cautious investors choosing interest bearing and other income-focused unit trusts while aggressive investors opt for equities, and more specifically foreign equities.
Another unfolding narrative is the equity-focused boxing match between ‘everything offshore’ and ‘local is lekker’ investment advisers. FAnews has often written about the ‘everything offshore’ views held by the likes of Magnus Heystek, founder of Brenthurst Wealth. He firmly believes in taking his clients’ discretionary investments offshore, subject to individual circumstances of course. Around November last year the offshore / onshore debate was sensationalised when a Biznews.com member offered R500000 each to Piet Viljoen, CEO at RE:CM and Heystek to see “which money manager could grow the initial principle the most in a five-year time horizon”.
Has the equity return horizon flipped?
Biznews.com reports that Heystek put the funds into a mix of the Franklin US Opportunities Fund, funds managed by Anthony Ginsberg and the Brenthurst Global Equity Fund, whereas Viljoen “has kept it simple and put his money where his mouth is, investing the entire R500000 in a fund that he manages, the Counterpoint Value Fund”. A couple of days ago, we saw a LinkedIn post that revealed that Viljoen’s local choice had got off to a flying start as local equities recovered and US equities choked late 2021 to early 2022.
It seems that many local advisers and investors prefer Heystek’s market view, as evidenced by a mere R9 billion in net inflows to the SA Equity General category for the year. Now this is where things get tricky, because often, when the herd is rushing in one direction, the financial markets are preparing a return party in the other. In this case, SA Equity General funds attracted smaller inflows than other categories despite delivering a strong average performance of 28% over the year. Ironically, the swing to offshore over onshore is coinciding with an apparent inflection point between return expectations for SA shares versus financial markets in the West. Time will tell, but it could be that local shares stage somewhat of a revival between now and 2030.
Plenty of ways to dollarize savings
It is possible to implement an offshore strategy using locally-registered foreign portfolios, with 592 such fund holding assets totalling R698 billion at the end of December 2021, compared to R562 billion at the end of the previous year. “Foreign currency unit trust portfolios are denominated in currencies such as the dollar, pound, euro and yen and are offered by foreign unit trust companies,” explained ASISA. “And these portfolios can only be actively marketed to South African investors if they are registered with the Financial Sector Conduct Authority (FSCA)”. Local investors who want to invest in these funds must comply with South African Reserve Bank regulations and will be using their foreign capital allowance.
ASISA observed that “just under half of assets under management are [sitting] in SA Multi Asset portfolios, with about a third in SA Interest Bearing portfolios and a mere 2% in SA Real Estate portfolios”. And the statistics confirm that South African investors are far more risk averse than their international counterparts. According to Mulder, 47% of all international CIS assets are invested in equity portfolios compared to only 19% of local CIS assets being held in SA equity portfolios. ASISA compared its figures to those provided by the International Investment Funds Association (IIFA), which reported on 146114 CIS portfolios worldwide, with US$68.2 trillion in assets under management at end-September 2021. Local investors have a mere (sic) 1710 local CIS portfolios to choose from.
Financial advisers play an important role
Around a quarter of the inflows into the CIS industry came directly from investors, though many of these individuals “pay for advice and then implement the investment decisions themselves”. By ASISA’s reckoning, intermediaries contributed 38% of new inflows in 2021, followed by linked investment services providers with 20% and institutional investors, 17%.
Writer’s thoughts:
Choosing the financial instruments that will deliver on your client’s financial objectives is often left to near the end of the financial planning process. One could argue that choosing an appropriate vehicle for your client’s financial journey is less important than where they plan to go or the path they intend taking to get there. Do we spend enough time matching product to financial need? And do you still rely heavily on the Collective Investment Schemes fund universe for your client’s discretionary savings? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.
