Equity market hit as volatility spurs move to interest-bearers
• Asisa senior policy adviser Sunette Mulder notes R220m decline in assets under management
For many years the Association for Savings and Investment SA (Asisa) used to complain about the reluctance of the public to invest in pure equity funds. They are, according to the textbook, the best asset class for long-term investment. And since 1960, when the all share index as we know it was started, the JSE has even outperformed the London and Wall Street markets.
But SA savers are proving to be happy to stay in unit trusts precisely because there are so many low-risk options — and at a time when after several interest rate cuts and bank deposits offer negative real returns. This makes even conservative unit trusts look attractive.
According to Refinitiv in Europe there were €126bn of withdrawals in the March quarter, from both actively managed equity and bond funds, and even €10.1bn from the increasingly popular exchange-traded fund sector. This is where Europeans prefer to access index funds. Equity makes up 36% of the European fund sector, well ahead of the 15% of SA funds. And bonds make up a further 27% of the European pie, compared with just 4% in SA.
Variable-term funds in SA, which do not have to stick close to the All Bond benchmark, have proved far more popular and make up 11% of assets.
The great strength of the SA industry is the asset allocation funds, which make up almost half the total. Fund managers have the freedom to protect capital value in these funds, often through derivatives. The funds vary from the high-equity funds, which make up 23% of the industry on their own and can invest up to 75% in equities, to the multi-asset income funds, which cannot invest in equity but are free to move among cash, property and bonds. These funds have provided a 6.7% annual return over five years, almost double what low-equity multi-asset funds have achieved (3.5%) at a time when general equity funds produced negative absolute returns (-2.8%).
In Europe just 19% of funds are held in multi-asset funds; many advisers prefer to take responsibility for their own asset allocation and do not leave it to the fund promoter. Against the European trend, there were net inflows of R23bn in the first quarter in SA, almost all of this into money-market portfolios.
But Sunette Mulder, senior policy adviser at Asisa, says the market turmoil led to a R220m decline in assets under management to R2.26-trillion. The move from equity portfolios over the past five years has been noticeable, she says — the equity portion has fallen from 23% to 15%, and interest-bearing has grown from 24% to 34%, making it more than double the size of the equity fund assets. Interestbearing funds attracted R9.9bn over the quarter, and the multiasset income funds a further R3.2bn.
Over the year the big losers have been the high-equity funds, with R17.5bn, general equity funds R16.8bn, and low-equity funds R12.6bn. These aren’t all withdrawals to get out of the equity market. Many of these funds are held in living annuities and are being steadily sold down as their clients live through retirement.
Mulder says it is not surprising given the extreme market volatility that people prefer the perceived safety of interestbearing funds. But she reminds that after the global financial crisis, the market reached new highs, and well before what most people expected. By May 25, the all share had recovered by 32% from its March low. Mulder suggests drawing up an investment strategy with your financial adviser. Unfortunately, many advisers who cut their teeth as salesmen for life insurers are hardly experts on financial markets, since few have worked a day at a stockbroker or an asset manager.
Unit trusts do not have a large presence in the institutional market, with just 17% of their assets held by pension and provident funds. The limited life licence has proved to be an efficient pooling vehicle for these clients and it is still perceived to be cheaper, though unit-trust fees are fully negotiable. And unit trusts remain a single-premium predominantly white industry.
Efforts to expand into the mass market, such as Fundisa, have proved failures. An issue is certainly the demand for smoothing from low-income clients, but surely there are enough brains in the mutualfund sector to both smooth and offer daily pricing and liquidity? Unit trusts were designed as a way for the ordinary saver to access the JSE, yet the industry has changed its target market to the affluent and helping them get a comfortable retirement.
It is surprising that there were substantial net outflows from global equity funds (denominated in rand) of R3.6bn in the year to March. It is one asset class that has beaten inflation.
There was also a substantial outflow from dollar-based funds, of R29.6bn in the March quarter alone. Much of this was from emigrants, who bought the funds as a convenient way to move their wealth and now have to sell it down to live off the proceeds. Investors who want to go to the trouble of getting tax clearance and using their offshore allowance now at least have 504 investment options, and many more, on the Old Mutual International and Glacier “life” platforms.
DTHE GREAT STRENGTH OF THE LOCAL INDUSTRY IS THE ASSET ALLOCATION FUNDS, ALMOST HALF THE TOTAL
MANY ADVISERS ARE HARDLY EXPERTS ON FINANCIAL MARKETS. FEW HAVE WORKED AT A STOCKBROKER OR ASSET MANAGER