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Local investors part ways with risky assets as uncertainty takes hold

07 September 2020 Gareth Stokes

Local investors appear to be abandoning riskier equity exposures and offshore diversification in favour of the apparent safety of fixed income asset classes. The latest collective investment schemes’ (CIS) statistics, published by the Association for Savings and Investment South Africa (ASISA), show a staggering R97.6 billion in net inflows into income portfolios for Q2 2020. This includes R48 billion into SA Interest Bearing Money Market portfolios; R22.7 billion into SA Interest Bearing Short-term portfolios; R15.1 billion into SA Interest Bearing Variable portfolios; and R11.8 billion into SA Multi Asset Income portfolios.

The CIS industry recorded a record net quarterly inflow of R88 billion, split fifty-fifty between institutional and retail investors. After including this sum, total assets under management (AUM) across the CIS industry increased from R2.26 trillion at end-March 2020 to R2.54 trillion by end-June. This represents a 12,3% quarter-on-quarter improvement in AUM. The flight to safety witnessed during Q2 2002 makes sense given the uncertainty caused by the rapid decline in global equity markets during March combined with the impressive returns achieved in income products. 

A perfect pick for risk aversion

“The low volatility of these portfolios combined with their inflation-beating performance makes them an obvious choice for risk averse investors,” said Sunette Mulder, senior policy adviser at ASISA. The SA Interest Bearing Short-term and SA Money Market portfolios have, on average, outperformed both inflation and equity portfolios over one and five year periods to end-June 2020. This outperformance is historically unusual; but may soon be reversed by monetary policy responses to the pandemic-induced economic crisis. 

The R97.6 billion net inflows into fixed income portfolios was made possible by investor flight from perceived riskier portfolios with equity and offshore exposure. Mulder noted that investors had ditched the SA Multi Asset High Equity, Medium Equity, and Low Equity portfolios, which each showed net outflows during Q2 2020. SA Equity General portfolios bucked the trend with a small R3.6 billion quarterly inflow. “Despite delivering negative returns over one and five years to the end of June, general equity portfolios may have presented an attractive buying opportunity for investors willing to stomach the volatility that comes with investing in general equities,” said Mulder. Those backing general equity in this way will have been rewarded by the more than 23% recovery in JSE-listed equities over the quarter. 

Income specialists weigh in on bond risks

Marriott, who bill themselves “the income specialists” offered a handful of pointers for portfolio positioning alongside their 2020 half-year results. They argued that SA government bonds offered the best value locally, with real yields in excess of 5%, and amongst the highest in the world. “Although South African government bonds are not without risk, especially given the strain the current crisis is placing on the government’s already stretched balance sheet, they remain one of the safest and most liquid investments available in the domestic market,” wrote Duggan Matthews, Chief Investment Officer at Marriott. 

But their bond commentary did not come without caveats: “We remain concerned about the trajectory of government debt-to-GDP and expect a continued deterioration in the years ahead; we have [therefore] limited our buying to the front end of the yield curve, favouring bonds maturing in 6.5 years”. The asset manager suggests limiting exposure to SA listed property due to unpredictable dividends and prefers distribution-focused REITs internationally. Cash exposure, which flies in the face of the CIS statistics, should be reduced. “With the South African repo rate sitting at 3.5%, there is minimal real return potential from cash,” wrote Duggan. 

ASISA observed that intermediaries still play a leading role in encouraging inflows to the CIS industry. The latest statistics suggest that 36% of new retail investments come via intermediaries, with linked investment services providers (Lisps) generating 21% of sales and institutional investors like pension and provident funds contributing 17%. The question is whether local investors should continue flocking to income portfolios? Equities and offshore diversification remain the ‘flavour of the month’ among financial advisers; but this is not borne out by the CIS statistics. 

Foreign portfolios lose their allure

The outflows from equity-rich portfolios were mirrored among the 500-plus locally registered foreign portfolios. Foreign portfolios may have held R533 billion in AUM at end-June 2020; but recorded a second consecutive quarter of net outflows, totalling R43.5 billion for the half year. Once again, investors seem to be getting things wrong. Marriott said that equity investors should consider quality companies for resilient growth with the top tips for financial advisers being to focus on quality companies; achieving maximum developed market exposure for better growth prospects and attractive dividend yields; and defensive local market exposure. 

Inflows in Q3 will look different if Marriott’s view holds sway. Duggan suggested a combination of high-quality, first world listed equities for growth, and medium term South African government bonds for yield, to enable portfolios to continue delivering reliable income and decent long term returns. “The future may be more uncertain than ever; but through keeping it simple, sticking to quality, and focusing on what is known we are confident that we will continue to deliver on our promise to investors of a more predictable investment outcome,” he concluded. 

Writer’s thoughts:
The latest ASISA statistics suggest that our love affair with collective investments schemes continues apace. And our preference for lower risk fixed income portfolios is also starkly evident. Do you still believe that collective investments, previously unit trusts, are suitable destinations for your clients’ discretionary savings? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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