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Consistent cash flows bolster Collective Investment Schemes

13 February 2009 Gareth Stokes

On Thursday, 5 February 2009, the Association for Savings and Investments SA (ASISA) presented Q4 2008 figures for the Collective Investments Schemes (CIS) industry. ASISA chief executive Leon Campher talked attendees through the latest industry developme

But while the 1% increase in total assets under management in the industry is commendable, we shouldn’t forget that this gain includes the R60bn net inflow mentioned earlier. In other words – at least R52bn has been sucked into the equity black hole created by the global financial crisis. The value of underlying equity assets has fallen in line with equity markets locally and abroad. To get a better understanding of industry developments in 2008 FAnews Online put some of the CIS sectors under a microscope.

Investors stampede to near-cash instruments

A look at the net flows by sector suggests a major sentiment shift among participants in the domestic investment environment. Investors are spurning equities in favour of ‘safe’ money market investments – and the trend has accelerated since 2005. Back then investors were net buyers of equities to the tune of R7.1bn, while money market funds gobbled up only R8.6bn. In the years since investors have been net sellers of equities – dumping R3.9bn in 2006, R4.5bn in 2007 and another R2.9bn in the latest year – while money market inflows have gone through the roof. Money market funds attracted R18.8bn in 2006, R20.3bn in 2007 and a massive R49.2bn in 2008.

Why should we be concerned with this development? It’s a phenomenon the CIS has painstakingly shared with journalists at each presentation we’ve attended. They say that equities remain the best performing asset class over the long-term and that the current obsession with money market and fixed income products defies logic. The consensus is that investors are too cautious with their asset allocations and respond too aggressively to short-term changes in the investment environment.

A quick look at the 10-year sector performances underlines their message. For the 10-years to 31 December 2008 the best performing sector is Domestic Equity Resources with an annualised 26% return. Other equity funds achieved equally spectacular results with Value (+24%), Industrial (+18%), Large Cap (+17%) and General (+17%) among the top six. These results are in line with the claimed long-term average return from JSE-listed equities of around 17% per annum. The best performing non-equity category is Domestic Real Estate which grew by 22% per annum to occupy third place. Over the same stretch, the Domestic Fixed Income Money Market category achieved a less than impressive 10% per annum. There were some foreign asset funds that performed worse; but that’s to be expected when foreign currency risks are factored in.

Greater appetite for offshore equity

The picture is slightly different for Foreign Collective Investment Schemes. In this separately reported universe the total assets under management grew to R114bn with a small increase in the total number of funds (to 382). Most inward investments in this foreign CIS space find a home in equities – with R78.7bn in Equities and R18.8bn in Asset Allocation. The balance goes to Fixed Interest funds. Inflows for 2008 came in at R3bn. The better equity weighting is probably due to the higher net worth and sophistication of investors using these instruments.

Commenting on the foreign CIS statistics, Cobus Kruger, London based Director International Investment for TriAlpha, said: “Equity remains the flavour of the month and it’s clear that product providers still have a lot to do in that arena.” He believes “there is a case to be made for asset allocation funds especially on the retail side” and urges “clients and advisors to consider that investment route.” Apart from some concerns around the capacity of South African retail investors Kruger says that “overall the foreign CIS results are excellent given the positive flows for one of the most difficult quarters ever experienced by the industry.”

Expect a volatile 2009

Campher warns that 2009 will be a tough year. He says the volatility witnessed in markets in recent times has not yet abated. Investors who want to guarantee long-term success should ensure proper diversification across asset classes, invest in line with their needs and risk profile, make a commitment to their investment strategy and concentrate on ‘time in’ rather than ‘timing’ the market. Campher jokes – “if you time the market right it’s not necessarily from great wisdom; but if you get it 100% right it’s guaranteed to be because you’re lucky!” The message for private investors is clear: Stop fiddling with your savings and trust equities to provide the returns you need over the long-term.

Editor’s thoughts:
Two things happen when the economy turns. Investors run into financial difficulties and liquidate a portion of their long-term savings to survive. And those with spare cash tend to invest cautiously so as not to ‘lose’ too much of their hard-earned capital. Have your clients exhibited either of these tendencies in recent collective investment transactions? Add your comments below, or send them to gareth@fanews.co.za

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