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No sign of a slowdown in collective investments inflows

19 October 2007 Gareth Stokes

The Association of Collective Investments (ACI) presented results for the third quarter of 2007 at a press conference in Johannesburg on 27 October 2007. Total inflows for the quarter were R3 billion higher than the second, increasing to R18 billion while

Good news is that retail investors seem to have shrugged off concerns about sub-prime and shaky global equity markets to almost double their share of quarterly inflows in the industry to R14.5 billion.

At the end of September 2007, the total collective investment assets under management reached R646 billion spread over 787 funds. Of the total domestic assets, 28% were in Equity funds, 27% in each of Asset Allocation and Money Market and the balance in Fixed Interest funds. This mix has been fairly consistent over time, although the Asset Allocation sector is gaining ground as a popular destination for investors funds.

ACI chief executive Di Turpin says that the continued strong cash inflow indicates that "there is confidence in the South African markets and there is confidence in the unit trust product. It is definitely being chosen by more and more people as an investment medium."

A three tier fund structure

It sometimes pays to go back to the basics, so in today's article we take a quick look at the collective investments industry fund classification structure. The ACI categorises its funds using a three tier structure. The first tier addresses geographical factors, the second tier determines the asset allocation employed in a particular fund and the third tier determines the focus.

At the outset you determine whether a fund is Domestic, Worldwide or Foreign. Turpin pointed out that 93% of collective investment assets fall under the Domestic first tier category. This category also attracted 91% of flows in the quarter under review and for obvious reasons this segment features prominently in the report. Once a fund is classified as Domestic, the asset allocation in the fund determines which second tier category it falls into.

Thus a domestic fund could be an Equity fund, Asset Allocation fund, Fixed Interest fund or Real Estate fund. These cover the various asset classes which are already familiar to financial intermediaries: equities, property and cash and bonds. A quick look at the third tier reveals no less than nine focus areas under Equity. Examples include General, Growth, Value, Large Cap, Small Cap, Resources and Financials referring obviously to the stock market sector the particular Equity fund focuses on. There are six focus areas under Asset Allocation, four under Fixed Interest (which includes Money Market funds) and one under Real Estate.

Where the money went

We have already established that retail investors are pouring money into Domestic funds. But what exactly are they buying? A look at the net cash flows in the quarter under review confirms a trend that has been in place for more than a year now. Investors are favouring Asset Allocation funds over Equity funds and have also shifted significantly into Money Market investments in recent times.

One of the interesting points is that assets under management in the various Prudential categories have risen from 5% in September 2002 to 19% in the latest quarter. "For those people who ask me whether unit trusts are being used more in the retirement market. I don't think I need to say anything it is quite clearly coming through in the figures," said Turpin.

Investors continue to shy a way from Equity funds. R122 million flowed out of this category in the latest quarter. The other sectors all experienced net inflows with Money Market (R5.9 billion) attracting slightly more cash than Asset Allocation (R5.5 billion).

The usual concerns

Unit trust returns over five years remain impressive. "Where else can you get returns of 30% plus over five years?" asked Turpin. Average five year performances across each focus group in the Equity category range from 25.74% to 46.84%. The top performance over five years came from a Small Cap fund which returned 70.51% per annum. The top performing Resources fund managed 64.6% and top performing general equity fund 54.36% over the same period.

In light of these stellar returns, Turpin believes that the continued flight from Equity funds is cause for concern. It confirms that local retail investors invest with too short a time horizon. "Hopefully we can persuade investors not to be scared by what is going on in global markets and to re-look at their asset allocation overall and make sure that they do have sufficient equity content going forward because it doesn't pay to try and time the market!".

Editor's thoughts:
Although most analysts believe the domestic equity market will continue to deliver inflation beating returns, there are definite signs that performance in this area will be much lower than the last five years. While investors are not panicking about global market conditions, they are aware of them and have perhaps started investing more conservatively. Do you favour money market and fixed interest funds over equity funds at the moment? Send your comments to
gareth@fanews.co.za


 

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