Voting with their wallets

Investors have overwhelming switched assets into money market and fixed interest funds. Mike Ronald of Marriott – The Income Specialists sees this as a flight to safety.

In the quarter to end March 2008, a massive R9 bn flowed into Money Market unit trusts and a further R2.4 bn was placed in fixed interest funds. By contrast, a net R6.7 bn was withdrawn from equity and real estate unit trusts.

“It seems that investors are nervous about the outlook for equities,” comments Mike Ronald (pictured right), an Investment Professional at Marriott – The Income Specialists. “They have sought refuge in the income-bearing assets.”

But he has a word of caution for investors. “They should not remain in cash for an extended period. It is easy for investors to become complacent and fail to monitor what is happening to their assets,” warns Ronald. “It is important that whatever assets they own, even cash, they need to be carefully managed to achieve their investment goal.” And Marriott should know as the company manages one of the country’s top five income producing funds measured over the past five years, the Marriott Core Income Fund.

He modestly admits that this was achieved through remaining true to the Marriott style and managing the portfolio actively, particularly in regard to asset allocation. Marriott began to lower exposure to long bonds as long ago as July 2005. Then, as interest rates began their upward climb, all property exposure was removed from the Core Income Fund. Finally, exposure to long bonds was taken down to zero by August 2007.

The success of the fund demonstrates the benefits of aggressive asset allocation. If an investor is not undertaking this role himself, he would be wise to seek out a manager who will carry out this role with conviction.

Although the market is widely expecting another interest rate hike in June – at least a further 50 basis points, but possibly even 100 basis points, according to Ronald – there will come a time when rates will turn and it is important that your manager is fleet-footed enough to accommodate the move in portfolio construction.

As far as bonds and property are concerned, for now the danger for yields remains stubbornly on the upside. With long bonds yielding 9.5% and inflation at 10.1%, bond yields could rise still further from present levels. For property, yielding some 8.4%, the risk is even greater. Of course, a rise in yield would imply a loss in capital value, hence Marriott’s defensive position.

“For investors looking for stability,” says Ronald, “we believe they should go back to basics. Income yields from traditional assets are too expensive at present and we would recommend moving into cash or a managed income fund, but note that they need to stay on their toes for the turnaround.”