Over the last four years (2003 to 2006) billions of rand have streamed into the collective investment industry. Yet, says Anil Thakersee, Head of Investments Marketing for Old Mutual SA, "we find that, on average, 75% of all flows that have gone into the
Over a similar period, says Thakersee, "all the action and all the return has come from equity funds." An investor who put R100 in a general equity fund in 2003 would have had in the region of R360 in the fund at the end of 2006. The same R100 invested in a fixed income fund would only be worth about R150.
The conundrum is that despite the extent of the current bull market in equities, investors have focussed on funds with defensive or conservative mandates. The question Thakersee poses is whether excessive regulation of the financial services industry has had a negative impact on investment returns.
He wonders whether regulation, "by forcing [financial advisers] to find appropriate solutions has not perhaps made us too conscious of risk, too conscious of being defensive, and [resulted in us] forfeiting or sacrificing some of the gains we could have achieved had we invested in high risk solutions."
Regulation is a global phenomenon
South Africa is not alone in its obsession with the regulation of the financial services industry. The trend prevails in many modern economies, including the United States, the UK and Australia. Factors driving this trend include ageing populations, poor attitudes toward savings and problems with defined benefit schemes.
Applying these measures to the local financial services industry reveals a looming retirement crisis. Retiring in the 21st century presents vastly different challenges to the same process a few decades ago. Retirees in 1935 expected to live for 13 years in retirement, in 1990 the number had crept up to nearly 20 years, and today the average retiree will have to provide funding for 25 years or more.
A commonly accepted statistic is that only 6% of South Africans will be financially independent in retirement. Consider this in conjunction with a national savings rate of some 14% to GDP (compared to Chile, for example, which manages 26%) and we can appreciate the need for intervention in the financial services industry.
There are other factors to blame for defensive fund inflows
While regulation may accentuate tendencies to invest conservatively, there are other reasons too.
Thakersee mentioned a number of these, including changes to risk profiling and risk tools used in the industry. He also mentioned the possibility that South African investors and fund managers are positioning conservatively in anticipation of another market correction.
However, the two factors which we feel contribute most to this shift in unit trust inflows is the increased share of retirement savings finding their way into this investment vehicle, and the increased access to collective investment funds by banking customers. These changes have been made possible by the transparency and accountability inherent in the South African collective investment marketplace.
From product to service to solutions
The continuing evolution in the unit trust environment has brought us to the space which collective investments occupy today. Thakersee said that today's focus is on 'outcome based funds' which move away from the peer group benchmark and strive instead to provide absolute performance and target specific outcomes.
Regulation and the greater focus on consumerism will ensure the migration from a sales driven investment universe to an advice driven one continues. Thakersee mentioned that it took 12 years for Australia's financial services industry to get where it is today. South Africa is only five years along the legislative process.
Unofficial numbers provided by the Old Mutual PFA division reveal startling statistics about the readiness of South African investors for retirement. As few as 15% of economically active consumers are making provision for retirement, only 13% of adults have some form of life insurance and in 2005 a mere 14% had access to medical aid schemes.
According to Thakersee these statistics prove that the "potential going forward in this market is enormous!" The extent of coverage afforded the South African citizen right now is so sparse that billions more could flow to the industry as these shortcomings are addressed. The collective investment industry has huge potential in the coming years, and will provide plenty of opportunity for those operating in the field of financial planning.
Editor's thoughts:
In the ten years starting 1969, the South African markets went absolutely nowhere. A similar situation occurred on the US Nasdaq exchange between x and y. What are the chances of a similar situation developing on the JSE in the near future? Send your comments to gareth@fanews.co.za
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