SA stats – investors dip toes in offshore investments

The fourth quarter collective investment scheme statistics released by ASISA today highlight two subtle but relevant changes from the third quarter of 2010:

· Firstly, a portion of the flows has moved offshore. While only at 7% of flows, it has increased from almost zero in the third quarter of 2010 and is a figure that we expect to grow going forward. There is no doubt that the one-way bet that has been emerging markets for the past eighteen months is now no longer a sure thing. While we don’t believe that we will see a significant decline in emerging markets (unless there’s a shock to the system), developed world equity markets are showing value relative to many emerging markets that are now overpriced. It is important that South African investors take advantage of both currency strength as well as significant foreign exchange control relief in order to diversify their portfolios internationally.

· The other notable trend, albeit small, is an uptick in flows into domestic equity funds. This not only illustrates returning investor confidence but also suggests that investors are defaulting to equities due to a lack of options. With interest rates globally likely to say stay lower for longer, cash returns will continue to be poor (as is reflected in the decline in flows into money market funds). Bonds will provide a return, but given that we are probably at the bottom of the domestic interest rate cycle, are subject to more risk.

So what should investors be doing?

In this uncertain environment, diversification remains key and investors should remain diversified between asset classes. South African equities, which are likely to outperform bonds and cash this year, should provide double digit returns. Although cash may not provide real returns, it is a useful diversifier and will at least provide a positive return if there is a shock to the system.