Cool op­er­a­tors

Unit trust fig­ures are en­cour­ag­ing

Finweek English Edition - - Communication & Technology -

LO­CAL IN­VESTORS are keep­ing cool heads. That’s the clear in­di­ca­tion from the lat­est unit trust stats and seems in sharp con­trast to the panic be­ing shown by in­vestors in many de­vel­oped coun­tries. A net in­flow of R19,9bn in the third quar­ter is quite re­mark­able given the cur­rent mar­ket tur­bu­lence. That’s re­flected in the R9bn drop in to­tal unit trust in­dus­try as­sets. Though some of that would be from money that’s been with­drawn from unit trust funds most of the de­cline is from fall­ing share prices.

But in the face of that, South African in­vestors are still putting money in. And it’s com­ing mainly from in­di­vid­ual re­tail in­vestors. The split of the quar­ter in­flow shows that re­tail in­vestors com­mit­ted R13bn while in­sti­tu­tions spent R6,8bn. It seems peo­ple are stick­ing to their in­vest­ment plans and tak­ing a long-term view.

The bulk of the money (R15bn), as ex­pected, went into money mar­ket funds. It prob­a­bly is the best bet for in­vestors ner­vous of eq­ui­ties and un­sure where to put their money. And while banks in SA seem to be in good shape and it’s un­likely any are go­ing to do a BoE on us, a money mar­ket fund re­mains a safer and more re­ward­ing op­tion.

But only as a short-term mea­sure. Ac­cord­ing to Pro­fileData, the money mar­ket cat­e­gory of unit trusts is near the top (third) of all the unit trust cat­e­gories in terms of per­for­mance, with a re­turn for the year to end-Septem­ber of 10,45%. But to get some per­spec­tive on that, you have to look at the three-year per­for­mance rank­ings. There money mar­ket funds are sixth from the bot­tom, with a re­turn of 8,9%/year.

Even money mar­ket funds aren’t en­tirely fool­proof. Though fi­nan­cial con­di­tions are ob­vi­ously very dif­fer­ent in the United States, ac­cord­ing to an As­so­ci­ated Press re­port, the Fed­eral Re­serve said last Tues­day it would pro­vide up to US$540bn to US money mar­ket funds. That’s due to huge with­drawals from such funds – about $500bn since Au­gust – that have a knock-on ef­fect on busi­ness in the US.

Com­pa­nies, typ­i­cally smaller com­pa­nies, is­sue com­mer­cial pa­per to the banks, es­sen­tially a short­term fi­nanc­ing mech­a­nism to meet monthly op­er­a­tional costs. Money mar­ket funds are large buy­ers of such com­mer­cial pa­per from the banks, so if the funds run out of money, they will stop buy­ing, com­pa­nies won’t be able to get cash for es­sen­tial items – such as their monthly pay­rolls – and there will be more panic feed­ing into an al­ready crit­i­cal fi­nan­cial sys­tem.

The flow pat­terns into unit trusts in SA are also re­veal­ing. Gen­eral eq­uity funds had an out­flow of nearly R900m – the only good thing about that is it was sig­nif­i­cantly less than out­flows from those funds over the pre­vi­ous two quar­ters. The big in­flows were into the ab­so­lute re­turn fund cat­e­gory (R927m), real es­tate (R737m) and pru­den­tial vari­able eq­uity (R375m).

Those are sen­si­ble choices with lim­ited ex­po­sure to eq­ui­ties. My only lit­tle con­cern would be with prop­erty. I don’t know those funds well, but Piet Viljoen, fund man­ager and ex­ec­u­tive chair­man at RE:CM, says prop­erty is cur­rently prob­a­bly one of the most over­val­ued as­set classes.

There were in­flows – small, but very much against the tide of mar­ket per­for­mance – into large cap eq­uity funds, growth funds and fi­nan­cials funds.

Those are the brave and far-sighted in­vestors who de­serve to get rich. The peo­ple buy­ing fi­nan­cials funds are tak­ing a re­fresh­ing view in the midst of what’s go­ing on world­wide and the re­cent poor per­for­mance of fi­nan­cials in SA. Over the year to Septem­ber fi­nan­cials funds lost 17,67%.

But there’s no doubt those shares are now very cheap and one day will come back strongly. Those in­vestors might have to wait a while but de­serve to be richly re­warded.

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