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Which SA unit trusts are attracting the most money?

Fund flows tell an interesting story.

The poor market returns in South Africa since the middle of 2014 have had a clear impact on investor appetite. Figures from the Association for Savings and Investment South Africa (Asisa) indicate that net flows into local collective investment schemes – unit trusts, exchange-traded funds and regulated hedge funds – have slowed substantially over the last four years.

As the graph below shows, new investments into these products have fallen to less than half of where they were in 2014.

Source: Asisa (click to enlarge image)

Note: Asisa calculates the annual new flow rate as new money invested in unit trusts, excluding money market funds, as a percentage of the total assets under management at the start of the year.

“Pre-2014, as an industry we were enjoying a new flow rate of about 10% per annum,” says Thabo Khojane, MD of Investec Asset Management and deputy chairman of Asisa. “Since then we have seen a depressed net flow rate. There has been a lot more money sitting on the sidelines.”

The depressed level of new investments coincides clearly with the lower investment returns seen on the JSE. Although the 12 months to June 2018 did produce a decent market return, this was generated by a small group of stocks. As a result, the majority of funds did not capture this growth and their returns were still mediocre.

“My expectation is that the equity market will not underperform bonds forever,” Khojane points out. “When that normalises, we should hopefully go back to a 10% net flow rate as an industry.”

The funds receiving the flows

If one looks at the 20 largest funds in South Africa, those that have been most impacted by this negative sentiment are equity general funds. As the table below indicates, the Allan Gray Equity Fund and Coronation Top 20 Fund have both experienced substantial outflows over the last three years.

Multi-asset low equity funds have also fallen somewhat out of favour. The Coronation Balanced Defensive Fund and Nedgroup Investments Stable Fund have both seen large outflows, although the Prudential Inflation Plus Fund has been slightly less affected and the Allan Gray Stable Fund has actually managed to attract net inflows.

Source: Asisa (click to enlarge image)

Khojane believes that given their scale, what has happened within these 20 funds is a good proxy for trends across the entire industry.

“If you exclude money market funds, broker funds and multi-manager funds, there are roughly 946 collective investment schemes in South Africa,” Khojane notes. “The top 20 account for 43% of all industry assets. So the experience of the largest 20 mutual funds is not an unfair reflection of what is happening more broadly.”

In that sense, there has been a clear preference for multi-asset income funds over this period. The Prescient Income Provider Fund, Stanlib Income Fund and Coronation Strategic Income Fund have all seen positive flows.

As the table below shows, the Prescient Income Provider Fund has seen the highest net inflow of any fund over the last three years. The Stanlib Income Fund is fourth on the list.

Source: Asisa (click to enlarge image)

“This is not surprising because multi-asset income funds have had a fantastic run,” says Khojane. “They have generated a net return 2% to 3% ahead of inflation. I wouldn’t project that forward, however, because over time multi-asset equity funds should outperform multi-asset income funds.”

The table also indicates that investors have continued to place large amounts of money in multi-asset high income funds. Half of the funds on this list are in that category.

It is notable that the Nedgroup Investments Core Diversified Fund sits in sixth place and that inflows into it have grown over each year. This is a passive balanced fund, and its performance suggests that investor appetite for these products is growing.

Two global equity funds – the Investec Global Franchise Feeder Fund and Old Mutual Global Equity Fund – also appear on this list. This is over a period when investors have been taking money out of the large local equity funds.

The Fairtree Equity Prescient Fund is the only equity general fund in this company. It is noteworthy that, as a newer manager, it has been growing its assets while more established funds have been seeing outflows. This fund is now larger than the Coronation Equity Fund.

At the other end of the scale, the funds that have experienced the highest net outflows over the last three years:

Source: Asisa (click to enlarge image)

The outflows from the Foord Balanced Fund and Coronation Balanced Plus Fund may be seen as something of an anomaly, given that investor preference for multi-asset high equity funds has not waned. However, this is clearly as a result of investors chasing individual fund performance. These unit trusts both enjoyed high inflows in the past when they delivered category-leading performance, but have experienced outflows over a period when they have lagged their peers.

The outflows experienced by equity general funds and multi-asset low equity funds are clearly illustrated by this table. Three of the largest funds in each category are represented on this list.

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That’s a very diplomatic comment for the reasoning behind the massive outflows from Foord.

Absa Global Core Equity should be there too amongst the highest net flows over 3 years.

It all makes a lot of sense. Not so sure that “over time” the JSE should outperform certain benchmarks. With continuous eroding of household income and no incentives for overseas investment it remains unclear what would boost local equity.

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