Asset allocation finally gets the jump on money market funds
Investors, financial advisers and fund managers endured a tough 2011. One of the best ways to gauge local investor sentiment is to study the movement of cash in and out of the Collective Investment Schemes (CIS) industry. The industry attracts billions of
Total CIS assets under management grew by R69 billion to reach R996 billion at 31 December 2011. That’s just R4 billion shy of the R1 trillion mark! (I, for one, believed that this level would have been breached last year). I’m guessing overall asset under management growth was stymied by a rather subdued equity market performance through 2011. The JSE All Share index, excluding dividends, was half-a-percent in the red. And the total return for the year was just 2.6%. “The volatility sparked by the ongoing crisis in the Euro-zone coupled with tough economic conditions in South Africa, impacted negatively on investor sentiment,” said Campher. He also observed that money market funds experienced heavy outflows as corporate investors repositioned their cash holdings. Who can blame them? With “lower for longer” interest rates the “cash is trash” cry is echoing in fund manager boardrooms countrywide.
Putting the brakes on fresh cash inflows
R48 billion sounds like a great deal of money. Yet the amount of cash that flowed into the CIS through 2011 represents the lowest net inflow in seven years! Net inflows were low throughout the year with poor performances in the second and fourth quarters. The culprit – as mentioned in the opening paragraphs – was the Money Market fund category. After massive net outflows in three of four quarter this category suffered a total net outflow of R21-billion for the year. Which category attracted the bulk of 2011 investor money?
The answer is plain to see. Domestic Asset Allocation funds attracted the bulk of investor money in 2011, leading to record-breaking net inflows of R43 billion! In stark contrast the Domestic Fixed Interest category (excluding Money Market funds already mentioned) attracted net inflows of only R14 billion. Domestic Equity funds recorded net inflows of R10 billion. The result is that the Domestic Asset Allocation category toppled the Domestic Fixed Interest Money Market category from its number one position in terms of assets under management in Q4 2011. The former category now boasts R277 billion in assets (or 28% of total industry assets) versus Money Market funds’ R252 billion (or 25%).
Investor interest in Domestic Asset Allocation funds has grown in recent years, thanks in part to marketing efforts by unit trust companies. These funds invest across the equity, bond, money and property markets and investors can rely on asset managers to decide on the appropriate asset class mix. It is well documented that asset allocation strategies are among the most important providers of long-term portfolio returns. Instead of fiddling around with funds from each of the asset classes – and wondering how much to allocate to each – you can snap up appropriate asset class diversification in a single hit.
No change to the fixed interest obsession
Despite the outflow from Money Market funds local investors still rely heavily on Domestic Fixed Interest funds. If you lump the Money Market, Bond, Income and Varied Specialist fund categories together they account for half of CIS domestic assets under management! “Investors can be forgiven for wanting to escape the relentless volatility of equity markets,” commented Campher. But he warned that these investors risked missing out on capital growth when the equity market recovers. Over the longer-term equities – and listed properties – have consistently outperformed fixed interest and inflation!
Markets have been choppy since 2008 so the five-year performance numbers appear to contradict this wisdom. The best average annual return over this period was from Money Market funds (9%) followed by 7% in General Equity funds and Asset Allocation funds. This is an alarming statistic given the 7% inflation estimate… Investors have suffered “nil” real returns across a number of investing strategies. But things look better over 10-years. Domestic Fixed Equity funds achieved 16% per annum over the past decade, followed closely by Asset Allocation Funds with 14%!
Further signs of consolidation
The CIS industry must seem daunting to new investors. At the end of 2011 the industry offered 947 funds, four more than at the end of 2010. Campher observed that the number of funds on offer contracted for the first time in the industry’s history during Q1 last year: “While new funds were registered during the year, a number of funds were also deregistered by asset managers rationalising their fund offerings.”
This rationalisation or consolidation should continue as fund managers realign their product offerings to meet regulatory changes and to echo the international trend towards offering investors more focused fund solutions.
Editor’s thoughts: Intermediaries are a vital cog in the CIS industry. Through 2011 an impressive 34% of investments into unit trusts came via intermediaries. Direct investments from consumer – no doubt often assisted by their advisers – accounted for a further 22%. Do you direct your clients’ discretionary savings to the unit trust industry – or do you believe there are better products available today? Add your comment below, or send it to [email protected]
