Have you ever strolled up and down the aisles of your favourite retailer wishing things were simpler? Capitalism is great, and so is the freedom to choose the products and services you prefer. But with dozens of alternatives, all promising to meet the same need, that freedom can quickly become overwhelming. Analysis paralysis sets in, leaving you stuck, unable to decide at all
The challenge in too much choice
Website Wikipedia.org describes ‘analysis paralysis’ as a situation in which the fear of making an error or forgoing a superior solution outweighs the realistic expectation of success if the decision is made in a timely manner. Put differently, you are so overwhelmed by choice that you cannot bring yourself to act. The problem is exacerbated in financial services, where ordinary consumers often lack the knowledge to understand how a particular solution works, let alone process the nuances between multiple offerings from different brands.
Your writer got to thinking about analysis paralysis as he surveyed the quarterly collective investment schemes (CIS) industry update provided by the Association for Savings and Investment South Africa (ASISA). These statistics, up-to-date as of end-September 2024, reveal that there are now over 1850 domestic CIS funds, plus another 723 foreign currency-denominated portfolios, for investors to choose form. How do financial advisers and planners carry out the due diligence required to select funds that meet their clients’ needs?
The fact that the CIS industry recorded around R5 billion in net inflows in the latest quarter suggests the advising community has little issue with analysis paralysis. “Investor confidence recovered in the third quarter of this year, resulting in net inflows into the local CIS industry of R5 billion over the three months to the end of September 2024,” ASISA wrote. Existing investors also reinvested dividends and interest totalling R37.3 billion, bringing the total net inflows for the period to R42.3 billion. Total net inflows over the preceding 12 months topped R86 billion.
Ticking towards the four trillion mark
The result is a robust improvement in industry assets under management (AUM), up 4.3% on the second-quarter total to R3.8 trillion. Solid equity returns on the JSE helped push total AUM 13.7% higher over the 12 months ending 30 September 2024. Sunette Mulder, senior policy adviser at ASISA, hinted that investors were more confident about the domestic outlook. “Much of the [lingering] investor anxiety has worked itself out of the system following a period of no load-shedding, a peaceful transition to a Government of National Unity, and the well-managed implementation of the two-pot retirement system,” she said.
It is interesting to reflect on the asset class distribution across such a sizeable fund universe. According to ASISA, 19% of CIS assets were held in SA equity portfolios and 30% in SA interest-bearing portfolios. Half of all assets remained in SA multi-asset portfolios, with just 1% in SA real estate. The small allocation to listed property will not surprise FAnews readers, but the continued popularity of interest-bearing funds over general equities might. The SA interest-bearing short-term category attracted R40.7 billion of the R86.0 billion in total net inflows over the latest 12 months, with the SA equity general category posting net outflows of R11.3 billion.
The statistics illustrate how difficult it is for investors to time turning points in the market, with investors abandoning equities as the sector staged somewhat of a recovery. Mulder commented that investors’ preference for lower-risk interest funds was unsurprising given the uncertain investment climate that prevailed for much of the period. Concerns over economic and political uncertainty meant that investors missed out on the solid equity run, as evidenced by an average 12-month return of 21.8% for the SA equity general category. This compared to an average return of 10.1% from the SA interest-bearing short-term category over the same period.
Fixed income surprise
There were a few surprises in the latest media release, not least being the outperformance from the SA interest-bearing variable term category, which topped the performance tables with a 24.3% average return over the one-year period. Only 6% of CIS assets under management are held in these portfolios. Turning to the 723 foreign currency-denominated portfolios, ASISA reported that these locally registered portfolios held around R913 billion at the end of September 2024, compared to R899 billion at the end of June 2024.
These portfolios recorded net inflows of R4.1 billion for the quarter ended September 2024, following net outflows of R2.4 billion in the second quarter. Locally registered foreign portfolios still recorded net outflows of R2.6 billion for the latest 12 months. These portfolios are denominated in currencies such as the dollar, pound, euro and yen and are offered by foreign unit trust companies. They can only be actively marketed to South African investors if registered with the Financial Sector Conduct Authority (FSCA), and local investors must comply with Reserve Bank regulations when investing.
As investors and their financial planners struggle to choose the risk-appropriate funds to achieve long-term financial planning objectives, the industry faces another challenge. Towards the middle of November, National Treasury issued a discussion document on the future tax treatment of CIS investments. The document follows a four-year-old commitment by Treasury to review the income tax treatment of amounts received by CIS portfolios.
New CIS tax regime looms
“The document offers several proposals for discussion aimed at implementing a new tax regime for CIS portfolios and achieving tax certainty [and does not mean] there will be a new tax liability for the millions of South Africans who save through CIS portfolios,” said Dr Stephen Smith, consulting senior policy adviser at ASISA.
Smith explained that the CIS industry is strictly regulated, and the investment powers of portfolio managers are stipulated in regulation. “It is therefore somewhat anomalous that explicit tax certainty should not be afforded these portfolios in law,” he said. It is hoped the eventual outcome will support the growth of savings that are essential to the country’s ongoing economic growth and development.
“This requires CIS solutions that continue to be attractive and easily understood by domestic and international investors; CIS portfolios should be of broad appeal and accessible to all and should not serve the interests of any special groups,” Smith said. “They should also encourage a new generation of South African savers who need access to a variety of financial assets to ensure their financial security and the realisation of their long-term financial ambitions.”
For some additional context, your writer listened to a podcast by Moneyweb.co.za featuring another Smith, this time Marianne Smith of Consult by Momentum. She told host Simon Brown that Treasury wanted to introduce legislation to “make a proper distinction between income and capital gains; it has been a grey area for quite a while … [the change] has been in the pipeline since about 2018.” The main concern raised during the discussion was that investors might become forced sellers of unit trust holdings to meet a tax liability generated via an administrative process.
Preventing a forced selling scenario
The comments will no doubt fly thick and fast as the industry seeks to prevent a scenario where taxpayers incur annual income tax liabilities on their unit trust holdings prior to sale. Be sure to have your say before the 13 December submission deadline.
Writer’s thoughts:
The ever-expanding CIS universe offers a window into the complex product landscape that financial advisers and planners have to navigate on behalf of clients. How do you deal with analysis paralysis as you go about advising your clients? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.
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