Cash is back in fashion as financial turmoil spooks investors
When times get tough, South African investors turn to cash. This fact is clear from the Q3 2008 Collective Investment Schemes report, which was released at a function in Johannesburg on 16 October 2008. It was the first time that collective investment figures were released under the Association for Savings and Investment SA (ASISA) banner. ASISA was formed this year by members of the Association of Collective Investments (ACI), the Investment Management Association of SA (IMASA), the Linked Investment Service Providers Association (LISPA) and the Life Offices’ Association (LOA).
Despite difficult market conditions the collective investments industry attracted net cash inflows of R20bn over the three months. But investors preferred ‘safe’ investments to equities, with R15bn finding a home in Fixed Interest – Money Market funds and R5.8bn in Fixed Interest – Varied Specialist funds. As expected, the largest outflows were recorded in equities, with R866m flowing out of the Domestic Equity – General funds. According to outgoing ACI chief executive Di Turpin: “Local investors seem to have wisely decided to sit tight and wait for markets to calm again rather than make rash portfolio decisions amidst these volatile trading conditions.”
Investors a slave to market sentiment
With R647bn under management in 872 funds the collective investments industry is a perfect foundation for a study of investor psychology. The latest trends confirm that the majority of private investors prefer cash during times of market volatility. They’ve indicated this preference with a move from equities into money market and fixed interest funds.
Despite R42bn in fund inflows in the last year the collective industry’s assets have only climbed R1bn (from R646bn to R647bn). Incidentally, the annual cash inflow is the lowest on record since 2003! The performance would have been worse were it not for the spread of funds in the collective investment environment. At September, 33% of all assets were in Money Market, 23% in Equity and the balance split between fixed interest, bonds and the flexible and prudential categories.
Short-term performance echoes grim economic conditions
There’s not much to trumpet as far as fund performance for the year to 30 September 2008 goes. No fewer than 17 of the 23 sector headings covered in the collective investment industry numbers recorded negative growth. The bottom three categories include: Domestic Equity – Small Cap (down 27%), Domestic Equity – Growth (down 20%) and Domestic Equity – Financial (down 18%). These returns reflect the chaos on the JSE this year. On the opposite end of the scale the cash instruments fared much better. The Foreign FI Bond leads the pack with a 21% return. Domestic – Money Market (+11%) and Domestic – FI Income (+10%) also fared well. We expect this trend to continue in the final quarter of 2008, with Foreign Bonds doing particularly well thanks to the big fall in the domestic currency in October.
The torrid time on domestic markets hasn’t dented the five year performance. Over five years (Sine September 2003) Domestic Equities – Industrial has provided investors with 28% per annum – and the worst five year performance from equity only funds comes from Domestic Equity – Resources with a 22% annual return. You won’t argue with such performance on a five year view! This once again signals clearly to investors that short-term market fluctuations have to be ignored when making investment decisions.
Turpin revealed that Assets in the industry have gown phenomenally since it was established in December 1965 with a mere R3m under management. Since then collective investments have rewarded investors with annual growth of some 33%. In contrast the All-Share Index has weighed in with around 13% (before dividends). A specific example using one of the oldest Domestic – General Equity funds would have turned R100 initial investment (on 30 September 1966) to R94 850.35 by 30 September 2008 – a return of 17.73% per annum.
Waiting for the turnaround
It makes perfect sense for investors to ride out the stock market storms in Money Market and Fixed Interest funds; but the long-term returns remain in equity territory. Turpin says investors shouldn’t be afraid to commit funds to equities through their monthly unit trust investments. Equities might not stage an immediate recovery; but when they do investors who accumulated units during the current market depression will be handsomely compensated.
“Investors will have to wait patiently for stability to return to markets. We have seen massive intervention by central banks across the globe using a broad range of measures and these will take time to work,” said Turpin.
Editor’s thoughts:
Investors who ride out short-term market fluctuations tend to do better than those who continually chop and change their investment mix. Although you may think you’re improving your position over a 12 month period the risk in switching from equities to money market instruments is in the timing. Have you been adding to your equity unit trusts during the current market slide, or do you prefer money market funds? Add your comments below, or send them to [email protected]
