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Collective investment cash flows slow in fourth quarter

18 January 2008 Gareth Stokes

The Association of Collective Investments (ACI) presented their latest results (for October to December 2007) in Johannesburg on Thursday, 17 January 2008. Although the industry as a whole attracted R8.4bn the amount is significantly lower than the third

Discretionary income under pressure

Cash flows in the fourth quarter of 2007 were the lowest since mid-2006 and confirm that South Africa’s savers are feeling the pinch. The Reserve Bank’s repeated interest rate hikes have severely dented disposable incomes with the result that discretionary savings have suffered. Although global concerns are likely to stunt cash inflows to the industry, ACI chief executive Di Turpin notes that “analysts forecast investors should still see inflation beating returns on equity funds this year. Fund performance over the past 12 months has been excellent.”

This said negative market sentiment is likely to impact significantly on the collective investment industry in the coming year. Turpin points out that “Lower inflows are in line with global collective investment activity where in the UK for example, the industry experienced net outflows, probably due to concerns around the sub-prime mortgage issues.” FAnews Online believes there is a possibility that the local industry could record negative cash flows in the coming year.

One thing is certain. If market conditions remain tough then we can expect to see some consolidation in the industry later this year. Fund management companies seldom fail in bull markets; bear markets provide the acid test for their businesses.

Collective investment winners

The largest cash inflows were recorded in the Domestic Fixed Interest Varied Specialist category which posted net inflows of R4.3bn in the quarter. These funds were popular with investors looking to take advantage of the higher yields in the wake of the interest rate hikes mentioned earlier.

Asset allocation (AA) funds remain popular. Cash inflows of R1.8bn were recorded in the Domestic AA Prudential Medium Equity category and R1.4bn in the Domestic Targeted Absolute & Real Return sector. The benefit of this type of unit trust is that investors don’t have to concern themselves with which asset classes to invest in as the fund managers make such determinations for them.

Foreign AA Flexible attracted R839m in the quarter – and Corontation’s Pieter Koekemoer believes that a number of fund managers will utilise more of their offshore allocations this year.

Money market contraction surprises

A number of sectors recorded net outflows in the quarter under review. Top of the list was Domestic Fixed Interest Money Market which showed a reduction of R1.6bn. There is a strong correlation between these outflows and the specific performance of some money market funds. There were some unexpected yield variations in the quarter which exacerbated the situation. Koekemoer believes the outflows from money market funds will be a temporary trend.

A more significant development is the one year return achieved in various unit trust categories. Unit trust performance for the year to December 2007 was lower than the five year average performance in almost every category. To mention one example, unit trusts specialising in Small Cap shares returned 32% in 2007 against their five year average of 40%. Funds focussing on Industrial shares managed only 20% against a five year average of 34%. But the real shock came from funds investing in Finance shares, which managed a paltry 3% return against the average 26%. And that proves that South Africa’s banks have not emerged unscathed on the back of global banking sector sentiment.

Koekemoer warned investors that the longer term unit trust performance figures would fall significantly should the next few quarters also show lower than average returns. But investors should not pay undue attention to these numbers. And Turpin agreed, reminding the audience that “Investors need to remember to stay invested and take a three to five year view – not attempting to time the market as long as their portfolios meet their goals. Most should be looking beyond this year into improved prospects for 2009 and include equities in their diversified portfolios.”

Editor’s thoughts:
The JSE All Share Index has fallen more than 10% since the highs it reached in 2007. This means that equity unit trusts (general and specialist alike) will probably struggle in coming quarters. Would you react to this market weakness and move funds out of equity – or are you prepared to ride the market storm and stay invested for the long run? Add your comment at the end of this article, or send it to

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