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Money market funds are back in favour

18 April 2008 Gareth Stokes

The Association of Collective Investments (ACI) released results for Q1 2008 at a media function in Johannesburg, Thursday 17 April 2008. And the question on everyone’s lips was how much of an impact the recent market volatility has had on the industry. A

Equities and asset allocation emerge as the biggest losers

As we’ve mentioned before, the ACI reports on cash flows to and from the industry in four main categories. These include equity, asset allocation, money market and fixed interest. Each of these broad categories includes a number of sub-categories. The equity category (for example) includes large caps, small caps, resource, industrial, financial and real estate sub-categories among others. The 884 funds slot into categories and sub-categories as appropriate. There are approximately 100 funds listed in the fixed interest space.

What the latest ACI numbers confirm is a significant move out of the equity category into the ‘safer’ money market category. Funds listed under the Domestic Equity General category were the quarter’s biggest losers with net outflows of R5.9bn. Domestic Equity Small Caps recorded outflows of R514m with Domestic Equity Financials not far behind on R465m. The big winners in the three months to March 2008 were Domestic Fixed Interest Money Market funds which attracted R9bn and Domestic Fixed Interest Varied Specialist funds which recorded inflows of R2.7bn.

These capital flows echo the one year fund performances to 31 March 2008. The average sector return for funds in the Equity General category is only 3.9% – with Equity Industrial (-0.86%) and Equity Financial (-14.23%) performing dismally too. What we’re witnessing is a demonstration of how industry players respond to short-term market fluctuations instead of focusing on longer-term results. Over a five year period (including the negative return of the latest year) funds in the Equity Financial category provided an annual compound return of 27.58%. Over five years investors who moved funds from equities to fixed interest would have sacrificed a substantial chunk of their maximum possible return.

Could the equity exodus be driven by financial advisers?

It seems money market funds have once again emerged as the dominant investment category in the unit trust market. At March 2008 money markets accounted for 28% of all assets under management in the industry with equities a close second on 27%. Prudential funds account for 20% of assets and confirm the trend to using collective investments as a vehicle for retirement savings.

If you consider the industry some six years ago the picture is substantially different. In March 2002 equities accounted for 37% of collective investment assets. At the time money market held 32% and prudential only 5%. That year the equity market suffered massive losses – dropping by around 30%. Investors have long memories and have approached the unit trust industry with caution ever since...

Although everyone agrees that equities outperform all other asset classes fund managers remain wary of overweight equity positions. Turpin notes that the major outflows from equities in recent months stem from three large funds which are dominated by financial intermediaries. This raises the question whether concerns with prudent financial advice and risk management might be forcing these advisers to take a more conservative position than they otherwise would have. If this is the case, we could be witnessing an unintended consequence of regulation.

Editors’ thoughts:
Today’s adviser has to fully communicate the risk inherent in equity market investments when liaising with clients. Although equities perform admirably over the long-term there is always the risk of a negative one year move. Fixed interest investments, on the other hand, are a sure thing. Do you think the FAIS Act forces you to err on the side of caution when determining equity allocations for your clients? Add your comments below, or send them to gareth@fanews.co.za

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