Investors cautiously optimistic for Christmas!
On 1 November 2011 the Collective Investment Schemes (CIS) industry published their quarterly figures up to 30 September 2011. I look forward to these statistics because they provide an overview of what South Africa’s retail investors, the guys who purchase unit trusts on the advice of their financial adviser, are doing. The numbers also give an indication of the overall wellbeing of local consumers. People wouldn’t be stashing money away in fixed income and equity unit trust investments unless they had a few rand to spare. What have South Africa’s retail and institutional investors been up to over the latest quarter?
The CIS industry reported strong net inflows of R15 billion, an improvement on the R4 billion net inflows in the second quarter, and only a few billion shy of the R18 billion recorded between January and March 2011. Leon Campher, CEO of the Association for Savings and Investment South Africa (ASISA), said that the CIS industry had benefited from net inflows totalling R36 billion over the nine months ending September, bringing the total assets under management in the industry to R960 billion. At latest count investors had a choice of 953 funds, though not all of these are open to retail investors.
Getting the low down on new investment flows
Campher said that R9 billion of the R15 billion in net inflows was new money, with the balance comprising distributions reinvested. This “new” money is not the only story dominating the CIS space as South African retail investors chop and change their unit trusts holdings. As investor sentiment shifts there is a continuous ebb and flow between the apparently “safe” fixed income accounts and higher return equity-based alternatives. Campher pointed out that the net inflows in the third quarter were strong despite heavy outflows from money market funds due to corporate investors repositioning their cash holdings.
Money market funds suffered net outflows for the second consecutive quarter this year. The Domestic Fixed Interest Money Market category recorded net outflows of R10.6 billion during the third quarter and R9.9 billion during the second! Campher said this outflow was inevitable as corporations moved their funds from ring-fenced money market and fixed income accounts to fund other investment opportunities. The exodus from cash or near cash is a good thing because both institutional and retail investors have found better yield opportunities for their capital.
Asset allocation funds grow in popularity
The last time I reported on CIS statistics I mentioned the growing popularity of asset allocation unit trusts. Asset allocation funds provide investors with a means to diversify across asset classes within one fund, usually managed by an expert fund manager. These funds invest in cash, bonds, equity and listed property in proportions carefully worked out by the professionals. And most investment analysts will tell you that the bulk of your long term investment return is generated by getting the mix between these classes spot on.
Proper diversification across asset classes is required to meet the investment goal of inflation beating long term capital growth without excessive volatility. “While the professionals will not always get it right, a good portfolio manager, given their training, experience and access to information, should get it right more often than the individual investor,” said Jeremy Gardiner, director Investec Asset Management.
The Domestic Asset Allocation category is proving so popular that it is close to toppling the Domestic Fixed Interest Money Market category from its number one position as the industry’s biggest category. At the end of September 2011, the former held R256 billion in assets under management, or 27% of industry assets while Money Market Funds accounted for R264 billion, or 28%! “The shift in investor focus from money market funds to asset allocation funds is a positive development,” said Campher. “As an industry we have consistently pointed out to investors that they are unlikely to achieve inflation-beating returns over the long term by holding their cash in interest bearing investments such as money market funds.”
Equity is another important component of your long term investment plan and the various domestic equity classes remain popular. Domestic Equity General unit trusts attracted the second highest net inflows for Q3 2011, with R5.6 billion. Gardiner noted that although South African stocks are certainly not exciting at the moment, investors needed to be careful of allowing volatility-induced fear to leave them in cash for too long. “In a world where interest rates are going to remain lower for longer and bond yields are under pressure, equities are probably the place to be over the medium to longer term,” he said. Over the past decade Domestic Asset Allocation Prudential Variable Equity funds delivered an average annual return of 15%, beating inflation by 9%. Domestic General Equity funds returned 17%, outperforming inflation by 11% and Domestic Money Market funds returned an annual 9% over the same 10 year period.
Offshore is still in the spotlight
A wealth of competition in the unit trusts space means that local investors have more investment choice than ever before. Retail investors therefore have numerous opportunities to take advantage of offshore opportunities as the rand threatens to weaken against a basket of major currencies (the dollar, Euro and pounds). As a result, locally registered foreign funds had assets under management of R124.1 billion at the end of September this year.
There are two main choices for investors hoping to use CIS instruments to go offshore. One option is to invest in one of the 111 rand-denominated offshore funds on offer. The second option is to purchase units in foreign currency unit trust funds that are denominated in currencies such as the dollar, pound, Euro or yean and are offered by foreign unit trust companies. These funds can only be actively marketed to South African investors if they are registered with the Financial Services Board, and local investors wanting to invest in these funds must comply with Reserve Bank regulations. The 346 foreign currency denominated funds recorded net outflows of R1.4 billion during the third quarter this year.
Editor’s thoughts: Unit trusts remain a vital cog in South Africa’s savings machinery. The versatile products lend themselves to medium term savings for holidays, education and house deposits as well as longer term retirement saving goals. In either case you need to lean towards equities to benefit from inflation-plus returns. Have you started moving your clients out of fixed income funds and back into higher yielding equity or asset allocation opportunities? Please add your comment below, or send it to gareth@fanews.co.za
