Average Jane takes a cautious view on the markets
The experts say asset allocation is the key to long-term investment returns. You’re better served getting the mix of assets correct than obsessing over which share or unit trust to add to your portfolio. The trick is to allocate your available capital to equities, property, bonds and cash in the right proportion. Unfortunately local investors show an alarming tendency to favour conservative cash-based products the moment the going gets rough.
Leon Campher, chief executive of the Association for Savings and Investment South Africa (ASISA), said the bulk of local investors’ money found its way to fixed interest investments in the second quarter of 2010. 48% of the R789 billion assets under management in South Africa’s Collective Investment Schemes (CIS) industry are tied up in fixed interest unit trusts. And despite equity funds achieving the best returns by far, only 23% of the total is invested directly in equity funds. This means the average unit trust ‘saver’ missed out on the 20%-plus returns generated on the JSE in the year to 30 June 2010.
The best and worst of Q2 2010
“Investors with a solid long-term strategy understand that it is time in the market that ultimately delivers inflation beating returns,” said Campher. “Holding your money in fixed interest investments may provide the comfort of stable returns, but these returns will not protect your capital against inflation over time.” To generate returns in excess of inflation you need exposure to equities. One way to secure this exposure is by investing in equity unit trusts, which have significantly outperformed cash over both one and five-year periods, across equity sub-categories.
The average performance achieved by unit trust funds in the Domestic Equity General sector was 19% for the year ended 30 June 2010, with no less than nine of the top performing unit trust funds in the domestic equity space. This compares to an 8% annual return from Domestic Money Market funds. Despite beating inflation (which averaged 4.2% for the 12 month period) by more than 15%, the general equity category suffered net outflows of R562 million in the latest quarter. Domestic Money Market funds, on the other hand, attracted net inflows of R7.7-billion! This is typical of savers’ reaction to economic turbulence. Campher says consumers continue to believe stock market volatility is the biggest threat to their retirement capital, while it’s actually inflation they need to fear!
But there were some promising signs. Savers are showing a willingness to diversify their portfolios. “As witnessed during the first quarter of 2010, the second quarter CIS statistics further cemented the trend of investor choice towards asset allocation funds,” observed Jeremy Gardiner, Director, Investec Asset Management. Approximately 40% of total fund inflows during the period ended up in this fund type, which is weighted 13% to equities.
Go offshore – while the ‘going’ is good!
There are other welcome signs of investors wising up, as it were. The latest statistics confirm R1 billion found its way to various offshore vehicles. Although this was down on the previous quarter – with R2.5 billion flowing into the category then – it proves investors are still taking advantage of the strong rand.
The rand won’t stay strong forever. As we write this government is being lobbied by big business and trade unions to implement policies to devalue the currency. Gardiner believes investors should diversify out of the rand during this window of opportunity. For how much longer will the rand trade in this range? It’s very difficult to say, but the consensus is the longer it stays in the low 700s to the dollar, the more time investors have to take advantage...
Inflation plus 7% is virtually unattainable
The objective of your long-term savings plan is to secure inflation beating (real) returns. If you don’t ‘beat’ 4.2% per annum – South Africa’s consumer price index for June 2010 – then you’re actually getting poorer! But it’s becoming more difficult to achieve this goal. We recently attended a presentation by Peter Brookes, boutique head at Macro Strategy Investments. He warned investors the inflation plus 7% scenario achieved by certain funds in the early 2000s was a thing of the past. Given return expectations for the different asset classes, locally and abroad, returns of this magnitude would only be possible with 100% of a portfolio invested in equities (not a good idea) and a healthy measure of luck!
Savers will have to moderate their return expectations over the next five to 10 years. “A successful savings strategy requires discipline and a willingness to commit to investments like equity unit trust funds that are likely to provide real returns over the long term,” concludes Campher.
Editor’s thoughts: Unit trusts remain extremely popular with private investors wanting to stockpile extra cash for retirement. But there are new financial products which could prove popular among the traditional unit trust consumer. Do you consider exchange traded funds as a viable alternative to unit trusts? Add your comment below, or send it to [email protected]
