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Have balanced funds changed investor behaviour?

An analysis of unit trusts statistics suggests they have.

South African investors have had to deal with very muted returns for the better part of the last five years. Between July 1, 2013 and June 30 2018, the average return from unit trusts in the South Africa multi-asset high income category was just 8.2%.

This was a mere 2.8% ahead of inflation for this period. Given that these balanced funds would ordinarily be expected to produce returns of at least CPI + 5% over a five-year period, this is obviously disappointing.

What is notable, however, is that despite this situation investors have continued to favour these strategies. The latest statistics from the Association for Savings and Investment South Africa (Asisa) show that multi-asset high income funds continue to be the main savings vehicle for most people invested in local unit trusts.

At the end of June this year, the assets of funds in this category increased to above 25% of all assets in South African collective investment schemes for the first time. As the table below shows, it is the only major fund category to have shown consistent growth in both terms of assets and as a percentage of the total over the last five years.

Total assets in SA collective investment schemes at June 30
  2013 % 2014 % 2015 % 2016 % 2017 % 2018 %
Equity general R221.8 billion 17.3% R284.9 billion 19.0% R316.2 billion 19.7% R315.2 billion 18.1% R323.3 billion 17.5% R359.9 billion 18.0%
MA high equity R241.4 billion 18.8% R326.0 billion 21.8% R368.4 billion 23.0% R419.7 billion 24.1% R454.4 billion 24.6% R505.9 billion 25.4%
MA low equity R141.1 billion 11.0% R179.0 billion 12.0% R211.1 billion 13.2% R235.9 billion 13.6% R225.1 billion 12.2% R230.5 billion 11.6%
Interest bearing short term R96.3 billion 7.5% R101.7 billion 6.8% R93.2 billion 5.8% R94.2 billion 5.4% R120.2 billion 6.5% R150.6 billion 7.5%

Source: Asisa

As the table shows, money invested in high equity balanced funds has more than doubled in the past 60 months. By comparison, the general equity and multi-asset low equity categories have both grown a little over 60%, and that growth has not been constant.

Through all market conditions multi-asset high equity funds have continued to attract assets. This is an extremely high level analysis, but it is encouraging for an important reason.

What it suggests is that although these funds have not delivered the absolute returns investors might have wanted, they have nevertheless performed a more important function – that is to help clients stay invested. Investors generally appear to have bought into the long-term story, despite the shorter-term issues.

The broad trends in the other fund categories seem to bear this out.

Between 2013 and 2015, the equity general and multi-asset categories all grew substantially. At the same time, money was withdrawn from interest bearing short-term portfolios, which are essentially bond funds.

After June 2016, however, there was a meaningful reversal in general equity funds. This coincides with the start of the period of weak JSE performance. The FTSE/JSE All Share Index was marginally lower over this 12-month period, and this is reflected in the overall assets in this category.

What is more telling, however, is the substantial decline in the percentage of assets held in these general equity funds. This peaked at 19.7% in 2015, and dropped off noticeably in the following two years. There has been a slight recovery, but as a share of the market, general equity funds are still below where they were in 2014.

Multi-asset low equity funds have followed a slightly different trend. They continued to grow in 2016, but have been noticeably less favoured since then.

It is possible that over the last few years risk-averse investors have preferred to invest in bond funds. Their share of the market has grown substantially since June 2016, having been in sharp decline before then.

This is almost certainly due to the strong rally in local bonds since the end of 2015. As the table below indicates, bond funds have out-performed over the past year, and even over five years have almost kept pace with balanced portfolios.

Category returns from SA collective investment schemes at June 30
  1 year 5 years 10 years
Equity general 7.9% 8.4% 8.9%
MA high equity 7.2% 8.2% 8.9%
Interest bearing short term 8.5% 7.3% 7.8%

Source: Asisa

In all fund categories other than multi-asset high equity funds, it appears that short-term market performance has influenced investor behaviour. Equity funds have fallen out of favour as the JSE has not delivered meaningful returns, and bond funds have enjoyed a resurgence on the back of a buoyant bond market.

Multi-asset high equity funds have, however, attracted assets regardless. One might argue that their rate of growth has slowed as returns have been less favourable, but in comparison to other fund categories their continued growth in assets is marked.

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I think one should be consider that most flows into Retirement Annuities is invested in Multi Asset High Equity funds. This would be a strong driver for this class to grow constantly.

Global Equity General over the last 5 Years delivered 13.2% (Fundsdata) and has outperformed Local Equity with 5%. The Balanced Funds also supply income and feature strongly in Living Annuity and other Retirement investments. Local Equity funds will remain unattractive while the political uncertainty drags on.

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