On investor psychology and fund allocation
Investor behaviour is largely sentiment driven. Investors pour their savings into equity-rich products during bull markets and favour conservative cash solutions when markets come under the cosh. The problem is investors seldom time the switch from equities to cash (and back) correctly. They typically remain in defensive positions for too long, missing out on the first months of share price recovery. And, on the flipside, they remain in equities well past the market peak.
One of the best ways to observe this investor behaviour is to examine investment flows in the domestic collective investment space. South Africa’s unit trust industry – through the Association of Savings and Investments South Africa (ASISA) – publishes comprehensive statistics on a quarterly basis.
Getting the timing wrong
What can we learn from investor decisions during the first three quarters of 2009? For one thing investors remained extremely equity shy. Investors continued to pour money into conservative money market unit trusts through the 21.6% stock market recovery that started 9 March 2009. It was only in Q3 2009 (by which time equities had added a further 12.9%) that funds started flowing in the right direction. ASISA notes: “Investors are finally ready to trade the perceived safety of cash for the potentially higher returns of equities.” The headline of the Q3 2009 ASISA media release is telling: Money market funds the biggest losers in the third quarter!
“Investors started abandoning money market unit trust funds during the third quarter of this year in favour of other unit trusts providing some equity exposure,” said ASISA. The result was a net outflow of R5.8bn from the money market unit trust space. As further proof of the conservative nature of private investors, consider that the quarter ending 30 September 2009 was only the third period in five years during which money market unit trusts recorded net cash outflows.
A massive industry
The unit trust industry remains a popular destination for individual and retail savings. A massive R99bn flowed into the industry over the 12 months to end September 2009, bringing total assets under management to R747bn. ASISA chief executive, Leon Campher, observed this was the second highest inflow over a 12-month rolling period ever achieved. “Never before has the unit trust industry managed assets of this magnitude,” said Campher, congratulating investors on their discipline through difficult economic conditions and unsettling market turmoil! Total inflows in Q3 2009 notched up to R15.6bn as the collective investment industry swelled to 903 funds.
Asset allocation the flavour of the day
Most of the inflows to the collective investment industry went to asset allocation funds, which recorded a net inflow of R10.2bn. The asset managers in charge of these funds must ensure the correct mix of equities, cash, bonds and listed property for optimal investment returns. The asset allocation strategy has gained in popularity in recent years with many analysts suggesting the correct mix of assets is responsible for the bulk of long-term investment return. Jeremy Gardiner, director at Investec Asset Management, shared some of his insights on the latest industry statistic. He commented that the significant move by investors into asset allocation funds proved private investors were delegating the responsibility of navigating tricky market conditions to the professionals. This differed from the ‘everybody is a portfolio manager’ stance taken through longer-term bull markets.
Gardiner warned that equity markets had run hard in recent months. Shares on the JSE are certainly not as cheap as they were six months ago. You can divide investors into two classes right now. On the one hand you have the ‘relieved’ investor who is largely in equities and whose portfolio has recovered substantially since the crash. On the other you have frustrated ‘cash’ investors who feel they’ve missed the rally and are desperate to time their move into equities. The best solution for these cash investors will be to gradually phase their cash into equities, using any market dips as ideal buying opportunities.
Editor’s thoughts: Market turmoil or not, equities provide the most consistent long-term investment returns. Yet South African investors prefer apparently ‘risk free’ cash alternatives afforded by money market and fixed interests unit trusts. Do you think the average South African investor is too heavily exposed to cash? Add your comments below, or send them to [email protected]
