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Equity turmoil erodes R10 billion in collective investment inflows

18 July 2008 Gareth Stokes

The Association of Collective Investments (ACI) released their results for Q2 2008 at a media function in Johannesburg on Thursday 17 July 2008. During the latest three month period the industry recorded R10bn in net inflows. And although the total assets

Money market investments still dominate

The good news is that investors have shown renewed faith in the collective investments industry. This quarter’s inflow reverses a five quarter declining trend since record gains of R28bn in Q1 2007. A closer look at how these flows are made up reveals the impact of recent market turbulence on investor psychology. Equities have lost further ground as the desire for ‘safe’ investment alternatives prevails.

The R10bn inflow consists of R10.2bn in to Money Market funds, R1.2bn in to Asset Allocation funds and the usual R1.4bn exodus from Equity. We can reveal that equity flows were negative in six of the last nine quarters. ACI chief executive Di Turpin confirms this equity oversight: “Equities have not been in favour for most CIS investment managers over the last three or four years.” This has caused many investors to miss out on the full benefits of South Africa’s equity market boom that started around April 2003.

A quick look at the quarterly flows in the Money Market space reveals how popular this savings mechanism is. Turpin said that outflows from these funds in Q4 2005 and Q4 2007 were largely caused by retail transactions. Individual investors remain extremely keen on Money Market funds.

What’s happening in equities?

Money Market investments remain the biggest slice of the domestic funds asset split with 29% of the pie. Fixed Interest accounts for 13% and Prudential 20%. The rest of the categories are tiny by comparison: Bonds (2%), Real Estate (2%) and Flexible (4%). Domestic equities account for the remaining 27% chunk of the R656bn total. Recent discussions have centred on the big price decline in equities, so we thought we’d take a closer look at the one and five year performances in various categories to see how damaging this fall has been.

And our first observation in this regard is that 10 out of 13 categories were unable to provide real returns over the short-term. Of these, four have performed dismally. Small Caps were down 16%, Industrials down 9%, Financials down 15% and Real Estate down 20% over the year. Over the last 12 months only one sector has provided a decent real return – Resources. Shares in this category were 38% higher on a one year view. And we’re sure the 11% improvement from Large Cap shares is largely due to the resource weighting in that category anyway.

You shouldn’t be in collective investments for the short-term. It takes time for any stock market investment to fully reward the investor. That’s why it’s heartening that all categories (bar Prudential Low Equity, Bonds and Foreign Equity General) have provided fantastic five-year returns. Resources come out tops once again with annual compound returns after fees of 35%. But Domestic Equity General (+30%), Large Caps (+32%), Small Caps (+34%) and Industrials (+30%) are not far behind. All the remaining categories achieved five year growth between 20% and 23%.

A good performance considering market conditions

Once again there’s a difference between what investment experts are saying and doing. Turpin notes that analysts have been trumpeting “the value of worldwide funds and rand denominated foreign funds” in recent times; yet collective investment funds in these categories are taking very little money. Turpin says the JSE is holding up well under the current market conditions. If we compare the JSE All Share Index to the London FTSE and US S&P 500 on a dollar basis then South Africa’s stocks have done significantly better over the last 12 months. We’re down just 3% versus 12% and 13% for the Western economies.

Collective investments enjoyed “a really good quarter considering the local market conditions,” said Turpin. And there’s no doubt – investing in unit trusts remains a great tool to save toward your long-term retirement goals.

Editors’ thoughts:
A look at the five year returns on collective investments supports the assertion that saving is a long-term game. Poor performances in a 12 month period are absorbed and smoothed when looking at the five, ten or fifteen year returns. What is your ‘ideal’ time window for a unit trust investment? Add your comments below, or send them to gareth@fanews.co.za

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