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Savers bet on collective investments

20 January 2021 Gareth Stokes

A sizeable R57 billion flowed into South Africa’s collective investment schemes (CIS) industry in the third quarter of 2020 despite the economic constraints introduced by the COVID-19 pandemic. An update issued by the Association for Savings and Investment South Africa (ASISA) on the 30th of November last year trumpeted “record net inflows” to the industry. A total R165 billion was invested into the more than 1650 portfolios under the association’s purview over the 12 months ending 30 September 2020. Assets under management in the industry topped R2.58 trillion, mostly invested in SA Multi Asset (47%) and SA Interest Bearing (36%) portfolios. The remainder of these assets were invested in SA Equity (16%) and SA Real Estate (1%).

Rewriting the record book

In an unexpected development the industry recorded two of its five largest quarterly net inflows during the year. The highest ever quarterly inflow was recorded in the second quarter, at R88 billion, with the third highest in the third quarter, at R57 billion. It seems counterintuitive that so much money flowed into the industry at a time when the economy was under fire and consumers under pressure; but this writer believes that the rise in unemployment triggered by lockdown and pandemic may have contributed to CIS inflows as investors sought short-term vehicles to hold their severance pay. This hunch is borne out by the fact that 26% of inflows into the CIS over the year to end-September came directly from investors. Intermediaries contributed 36% of new inflows; linked investment services providers 21%; and institutional investors 17%. 

2020 is the fourth consecutive year during which investors have preferred interest bearing portfolios over equities. Sunette Mulder, senior policy advisor at ASISA, explained that CIS portfolios in the SA Interest Bearing: Short Term and SA Interest Bearing: Money Market categories were at the top of the return performance tables over one and five years to the end of September 2020. Investors’ preference for interest bearing portfolios is illustrated by the net inflows to CIS categories, with R25.2 billion flowing to SA Interest Bearing: Short Term portfolios and R13.1 billion to the SA Multi Asset: Income portfolios. Investors obtained their offshore equity exposure through local funds during the third quarter of 2020, with R7.4 billion flowing into Global Equity General portfolios compared to outflows in both the SA Equity: General and SA Multi-Asset: High Equity categories. 

Upping the offshore vs onshore ante

The offshore versus onshore debate informed countless analyst discussions during 2020. We also witnessed a public spat between ASISA and one of its smaller members, Sygnia Asset Management, in November. Sygnia was unhappy with the association’s request to the South African Reserve Bank (SARB) to suspend Exchange Control Circular 15 of 2020, pending further consultation. This request was apparently prompted by a handful of ASISA’s large asset manager members. 

During a heated biznews.com radio interview with Alec Hogg, broadcast on the 26th of November 2020, Sygnia CEO, Magda Wierzycka, accused certain large asset managers of “not acting in the best interest of investors”. She dismissed exchange controls as a “great prejudice to South African savers and South Africa in general” because they made it difficult for investors to achieve appropriate global diversification. You can read more in our article Do large asset managers have your client’s best interests at heart

ASISA offers a separate analysis of the 531 locally-registered foreign portfolios, which allow South African investors to make direct investment in foreign currency funds. The association noted that “foreign currency unit trust portfolios were denominated in currencies such as the dollar, pound, euro and yen and were offered by foreign unit trust companies”. These funds can only be actively marketed to South African investors if they are registered with the Financial Sector Conduct Authority (FSCA). Clients who invest in these funds must comply with SARB exchange regulations and will have to use their regulated foreign capital offshore allowances. 

This segment of the CIS universe comprised R543 billion in assets at the end of September last year, up from R533 billion in the second quarter. Despite the growth in assets under management, the sector recorded net outflows throughout the year, possibly due to investor concerns over the impact of pandemic on offshore shares. Outflows were highest in the first quarter, which coincided with huge corrections in the UK and US indices. Investors who exited offshore equities following the big sell-off in March will have missed out on the subsequent rebound and continued strength of these indices through the second half of 2020. The S&P 500, for example, hit a low of 2237 points on the 23rd of March 2020 before posting a stellar recovery, ending the year with an index return of more than 14%. 

The way forward

Mulder cautioned retail investors against making ill-informed investment decisions based on short-term market movements. She observed that investment performances were influenced by many factors and that past performance was not a reliable indicator of long-term future return prospects. The best course of action is for retail investors to consult with their financial advisers for guidance on asset allocation strategies that are appropriate for their life financial plans. “Investors should be encouraged by their financial advisers to structure diversified portfolios that include exposure to a range of assets classes, including equities and fixed interest,” concluded Mulder. “Geographic diversification is an important consideration when constructing such portfolios”. 

Writer’s thoughts:
Diversification through asset allocation and appropriate geographic exposure remain key influencers of long-term investment returns; but the exact mix of asset class and onshore / offshore market exposure must make sense to individual investors. What is your view on asset class exposure as we enter 2021? And to what extent do you believe your clients should be invested offshore versus onshore? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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