Diversification may be the key to economic stability
There have been a number of events in history which have simply changed the way in which we approach life. This is particularly true for investing. Like the Great Depression of the 1930’s, and the 2009 financial crisis which changed the way in which investors looked at achieving economic growth for their clients.
Because of the volatility that followed the recovery of the crisis, investors looked towards non-traditional saving methods to achieve this growth. The Association for Savings and Investment South Africa (ASISA) shows that Collective Investment Schemes (CIS) have gained significant popularity in the South African market.
By the end of December 2013, investors had invested an estimated R1.5 trillion with the CIS industry. This was more than double the R661 billion invested only five years ago.
The 2013 local CIS industry statistics, which were released by ASISA also, show that over the past 10 years, the industry has seen assets under management increase by more than fivefold.
Leon Campher, CEO of ASISA, says that while the strong run of the equity market has certainly played a role in the growth of CIS assets, unprecedented net quarterly inflows in recent years strongly bolstered assets under management.
"In 2013, the industry attracted net inflows of R177 billion far exceeding the 2012 record of net inflows which came in at R120 billion,” says Campher.
At the end of December 2013, the CIS industry offered investors a choice of 1 062 portfolios.
Research conducted by the International Investment Funds Association (IIFA) shows that worldwide, there are 75 274 collective investment scheme portfolios with total assets under management of $28.8 trillion.
Limited room for growth?
But are we limited to the growth presented by CIS schemes? Johan van der Merwe, Head of Sanlam Investments singles out three trends that South African investment managers can leverage over the next few years: passive investment, savvy retail investors and a focus on Africa.
"Passive investment will continue to take off locally, especially in a low income and return environment where the cost of managing funds becomes an issue.”
He points out that the second trend is the rise of the financial services consumer and the potential for investment managers to tap into a more savvy retail investor.
Lastly, van der Merwe notes that Africa is once again top of mind for international investors and will continue to remain a huge focus in the current year. However, active vs passive remains a point of debate.
Sanlam’s group economist Jac Laubscher feels that the more prevalent passive investment is, the more scope there will be for mispricing shares, ironically creating greater opportunities for active management and undermining the case for passive management.
"Although it does not say so explicitly, it appears that National Treasury is propagating greater use of passively managed portfolios in managing retirement fund assets, in the expectation that fund members will enjoy higher net returns because of lower investment fees, to the benefit of their retirement capital,” said Laubscher.
He added that in the long run, lower economic growth implies lower profit growth and lower returns on investment, leaving the possibility of investors, including the passive variety, being worse off than with active management.
Rezco Asset Management concurs with Laubscher saying that investors cannot simply look at passive investing for retirement but notes that there has to be a place for both. The company adds that active managers do play an important part in the market, as they offer products that complement passive or index funds in very positive way. A blended active plus passive approach to investing can potentially bring protection against downside risk and create higher returns during strong equity markets.
Look closely at investment options
It is clear that the current investment environment is ever changing with the strong possibility that passive investments will take precedence over active investments. The role of the adviser is key in this space as they have access to top expert fund managers whose advice is highly sought after by investors.
Because of the current economic conditions that the world finds itself in, gravitation towards CIS could be a mainstay of the South African market for a number of years. The economies of scale aspect of investing play a major role in the containment of costs, which investors find highly attractive in the current market space.
Editor’s Thoughts:
ASISA often
reminds us that clients are not saving enough for retirement. In this case the
saving part is not the issue… it’s about how the savings are invested for
maximum return the day your client retires. Have you managed to get that mix
right? Please comment below, interact with us on
Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
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