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SA unit trust investors may be more resilient than you think

No dramatic rotation away from South African equities.

Over the past few years South African investors have been faced with an extremely tough local environment. For the five years to the end of March 2019, the FTSE/JSE All Share Index delivered a total return – with dividends reinvested – of just 6.44% per year.

At the same time, cash, as measured by the Barclays Capital/Absa Capital ZAR Tradable Cash Index (Traci), gained 6.84% per year.

This has created the rare scenario where cash has outperformed equities over a sustained period.

Bonds have fared even better. The JSE All Bond Index was up 8.29% per year over this time.

Given how unusual this period has been, and for how long it has persisted, it’s understandable that some investors, unnerved, have moved away from local shares. This is reflected in the latest unit trust statistics released by the Association for Savings and Investment South Africa (Asisa).

A move away from equities

According to Asisa, the unit trusts that attracted the highest net inflows over the year to the end of March 2019 were those in the South African interest bearing short term category. These are bond funds.

For this 12-month period, these unit trusts saw net inflows of R39.7 billion. At the same time, there were net inflows of R32.8 billion into South African interest bearing money market portfolios, and R26.6 billion into South African multi-asset income funds.

That is a total of R99.1 billion of net inflows into funds with minimal to no equity exposure. This comfortably represents the bulk of the total net inflows of R143.4 billion into all unit trusts over this period.

While this would suggest that investors have shied away from South African equities, just looking at the new inflow numbers only tells part of the story. In context, these figures are actually relatively small.

The bigger picture

The total value of unit trusts in South Africa was R2.38 trillion at the end of March. The R99.1 billion of net inflows into these funds over the year therefore only represents 4.2% of the overall fund universe.

In fact, if one takes a longer view of the market, there have only been subtle shifts in asset allocation over the past three years. This is the period in which equity underperformance has been most pronounced, as the table below shows, which would have caused investors to shift their approach.

SA unit trust performance for the three years to March 31, 2019
Category Average annualised return
South Africa equity general 2.32%
South Africa multi-asset high equity 3.79%
South Africa interest bearing short term 8.44%
South Africa interest bearing money market 7.61%

Source: Morningstar

As the table below shows, however, the only substantial change between the major unit trust categories has been the 3.45% increase in the market share of short term bond funds.

South African unit trust market
Category Assets under management Share of the overall market
At March 31, 2016 At March 31, 2019 At March 31, 2016 At March 31, 2019
South Africa equity general R318 billion R351.8 billion 18.62% 16.76%
South Africa multi-asset high equity R414.3 billion R523.6 billion 24.27% 24.94%
South Africa multi-asset income R126.4 billion R167.8 billion 7.4% 8%
South Africa interest bearing short term R88.2 billion R181 billion 5.17% 8.62%
South Africa interest bearing money market R267.4 billion R344.3 billion 15.66% 16.4%

Source: Asisa

In absolute terms, multi-asset high equity funds have grown the most over these three years. The category has shown a total gain of R109.3 billion, compared to the R82.8 billion increase in interest bearing short term funds.

These funds have shown a small gain in their overall share of the market over this period as well. They now account for effectively one quarter of all money invested in unit trusts, and that continues to grow.

It is also notable that even though the percentage of assets held in South African equity funds has decreased, in absolute terms there is still more money in local equity funds than money market funds. Equity funds also hold more assets than interest bearing short term funds and multi-asset income funds combined.

This suggests that the number of investors who are dramatically changing their asset allocation is relatively small. Despite the market environment, there has not been a drastic rotation away from equity and high equity funds.

The fact that multi-asset high equity funds have continued to grow in both absolute and relative terms also suggests that these portfolios are achieving an important objective – keeping people invested. Their lower volatility and diversified sources of return appear to be giving investors enough comfort for them not to switch to other strategies.

Looking offshore

Given that the solution many commentators have proposed to the low growth in the local stock market is to seek returns offshore, it’s also interesting to note that the share of money held in global funds has also not increased materially over this period. As the table below shows, there has only been a small amount of growth in global funds relative to South African funds over the past three years.

South African unit trust market
Category Assets under management Share of the overall market
At March 31, 2016 At March 31, 2019 At March 31, 2016 At March 31, 2019
All South African funds R1.71 trillion R2.1 trillion 88.93% 88.05%
All global funds R159.3 billion R216.9 billion 8.3% 9.1%

Source: Asisa

On an absolute basis, the South Africa multi-asset high equity category has grown almost twice as much as all global funds. Global portfolios remain less than 10% of the overall market.

This may be slightly misleading, as it is likely that many investors who have taken money offshore have done so into funds that are not domiciled in South Africa. That money would not be reflected in these statistics at all.

Nevertheless, those investors would represent a minority, so these figures suggest that the strategies employed by most investors in South Africa have not changed materially over the past three years, despite the tough environment. That implies a certain level of resilience, which, over the long term, should be rewarded.

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Same old, same old. Jam tomorrow, jam tomorrow the endless claptrap that has been dished up for years by the..cover your ears children..’Financial advisers’
So, they got it totally wrong for years and years and cash outperformed equities. How this person can keep a straight face when he gives out advice to the little old pensioners and retirees he sees must really take some doing, that’s for sure.
But I guess it’s just another case of any mouse clicking ‘profession’ will do rather than get a REAL measurable SKILL such as plumbing, carpentry or sheet metal working hey?

Somewhat harsh commentary when the article is based on verifiable facts and a level headed perspective on those facts. I too don’t have much confidence in the long term local equity outlook, but that does not change the facts quoted here. I didn’t see Patrick attempting to make strong case to keep all your eggs in the local basket, so take a deep breath Davebee

As someone that has a mouse clicking profession I am offended 😛
But I would really like to see a plumber/carpenter/sheet metal worker try and write some code in Assembly 😛

Out of interest, what would have been your recommendation five years ago given the facts then? Cash?

Davebee, if he was advising the little old pensioners and retirees to be mostly in equities and not cash then you’d have a point, but was he? Davebee, are you retired? Maybe that explains your myopic focus on those, some of us here are 40 and under, and cash isn’t the place to be for us, maybe 10% at most.

Do these numbers include RA’s? I suspect the asset allocations in RA’s and other retirement vehicles are relatively constant.

If you frame the above discussion differently …new money entering the market does not expect future equity returns to exceed returns from cash and bonds.

It would be interesting to know how much of this new money is directed via financial advisers. Is this a case of chasing the asset class with the best recent past returns?

I hazard the assumption that the FAs continued to make substantial amounts from investors’ accounts regardless.

New money is a small percentage of the existing investment pool, so these small changes represent big changes in the mix of new investments. There is a general belief that equity markets have become very risky. SA Income funds are a good place to park money. Some of this money will go offshore when the exchange rate and market dips permit.

Maybe bit off topic but how real is the risk of prescribed assets and what would the impact of its imposition be?

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