Balanced funds’ continued rise

ADVANTAGE: EQUITY-LIKE PERFORMANCE, LESS VOLATILE

How the local asset management industry has undergone a structural change. Moneyweb

SA’s unit trust industry’s growth over the last 20 years has been phenomenal. At end 1998 there were 204 registered unit trusts, with assets of R71 billion.

By end 2018, this had grown to 1 567 funds, with R2.2 trillion assets under management – that’s 18.8% compound annual growth (vs the JSE’s 14.4% market capitalisation growth).

Put another way, at the end of 1998 the total money invested in local collective investment schemes was 7.1% of the JSE’s total market cap. By 2018 it was 17.7%.

The big change

As Corion Capital chief investment officer David Bacher notes, one of the main reasons behind this growth has been the rise of multi-asset funds. Twenty years ago, they held 9.4% of the total money invested in local funds. Today, it’s over 50%.

The popularity of these funds began to accelerate in 2004. Since then, they’ve grown at a compound annual rate of 27% – more than twice equity funds’ growth rate.

Also, while the size of the overall unit trust market has grown far more quickly than the JSE’s market cap over the past two decades, the assets held in pure equity funds relative to the stock market have declined.

In 1998, the total assets in SA equity unit trusts came to 4.5% of the JSE’s total market cap. By end 2018, only 3%.

This was, however, more than compensated for by the growth in multi-asset funds, and subsequently their share of the JSE. At end 2018, their total domestic equity holdings came to R353.7 billion – 2.8% of the JSE’s market cap. Twenty years ago, their JSE exposure was negligible.

Driving factors

Bacher identifies four key factors as to why this happened.

There’s better financial advisor regulation. The Financial Advisory and Intermediary Services Act, effective 2004, significantly impacted the way advisers looked after clients’ money. Until then, they’d predominantly balanced their clients’ asset allocation themselves, using separate equity and bond funds. “The introduction of the FAIS Act led to financial advisers becoming more uncomfortable making assets class decisions. These decisions are now being driven more by the investment managers.”

Treasury’s decision that retirement annuities (RAs) must comply with Regulation 28 of the Pension Funds Act. Since most multi-asset funds are Regulation 28 compliant, this also made them the preferred vehicle for these portfolios.

Investors and financial advisors realised the tax benefits of using asset allocation funds. “Allocating between asset classes within a fund does not trigger capital gains taxes.”

However it’s likely the above reasons would’ve been moot without the last: the risk-adjusted performance of multi-asset funds has been compelling over this period. Overall, investors have enjoyed equity-like performance at much lower volatility levels.

“For example, the Multi Asset SA High Equity Category (largest multi-asset sub-category) has delivered a return above inflation of over 6% net of all costs over the last two decades .… these real returns were delivered with approximately two thirds of the volatility risk, resulting in high risk-adjusted performance.”

Assets held in pure equity funds have declined

Gerhard Kotzé is the Managing Director of RealNet

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