Category Investments

So where did it go?

21 May 2004 Angelo Coppola

The unit trust industry had a bumper year in 2003, with net inflows more than doubling to R41.6bn from R19.6bn in 2002, when investors withdrew a net R3.2bn from equity funds and asset allocation and fixed income funds were down 42% and 62% from the previ

Money market funds were the only ones to show an increase in net inflows in 2002, says Debbie Prinsloo of Investment Solutions.

She says the reasons for the sharp turnaround in 2003 were that:

* Targeted-absolute and real-return funds (a new category) had inflows of R1.5bn

* The flexible property fund category also benefited from inflows of R1.4bn

* The varied specialist bond funds doubled their inflows

* The varied specialist equity funds quadrupled their inflows

* General equity funds gained back most of what they lost in 2002

Prinsloo says other than the general equity funds, the other categories mentioned are relatively new and clearly appeal to investors. Of importance is that the money market accounts for more than half of the R41.6bn net inflows.

Targeted-absolute and real-return funds invest in a mix of equity, bond, money market, listed property and derivative instruments. They vary in terms of return objectives and risk, but short-term volatility is generally lower than average.

These funds don't necessarily offer any performance or capital guarantees and need not conform to retirement fund legislation.

"They are managed with the aim of beating a pre-determined explicit absolute/real benchmark, for example CPI +x% over three years, or the after-tax return of call deposits.

"This, together with their low short-term volatility, has made them popular with investors seeking to minimise downside in their investments, and at least maintain their investment.

“There are 13 funds in this category," says Prinsloo.

Absolute return is a return above zero, while real return is a return above inflation. A relative benchmark, as opposed to an absolute/real benchmark, would be, for example, the FTSE/JSE All Share Index, where the index could return negative 10%, but a general equity unit trust beats this benchmark and returns negative 6%.

Relative to the benchmark, the general equity fund has outperformed, but has still lost the client money because the return is negative.

Prinsloo explains that the flexible property fund category includes funds that invest between 50% and 95% in securities listed in the real estate sector of the JSE, and the balance in liquid assets.

“These funds aim to provide investors with high levels of income and long-term capital appreciation.”

In 2003, listed property provided investors with returns of about 40%, in addition to yields of 11%. (Property unit trust and property loan stock returns were used as a proxy for listed property.

These numbers exclude Liberty International, which forms part of the Real Estate Index).

Varied specialist bond funds were the third category to benefit from inflows in 2003. "As the name suggests, these funds cannot be classified in the money market, income or bond fund categories and also cannot be compared with each other as each has its own risk-return objectives.

Generally, funds in this category aim to maximise income, and preserve capital or maintain a high degree of capital stability. Some funds also offer the potential for capital growth.

They invest in bonds, fixed deposits, money market instruments, listed debentures and other high yielding securities. Again, what appeals to investors is stability or preservation of capital, together with the potential for a high income," says Prinsloo.

Again, funds in this category do not fit any of the other equity categories and cannot be compared with each other.

"It is evident that funds offering a high degree of capital stability and/or a high income were the main beneficiaries of inflows in 2003.

"The unit trust industry remains a valuable investment vehicle for many local investors, and its success lies in being able to adapt to the new and changing needs of investors," says Prinsloo.

It is evident that funds offering a high degree of capital stability and/or a high income were the main beneficiaries of inflows in 2003.

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