THE MARKETS JACQUES MAGLIOLO
THERE is a misconception in the market which will simply not go away. Despite repeated warning signals that the bottom is about to fall out of the stock market, investors in unit trusts still believe that they are immune from its effects.
Analysts say many investors believe ”unit trusts magically exclude them from downward market movements, but expect significant returns when bulls predominate”.
This way of thinking seems to be expounded by the Unit Trust Association, which continually promotes the idea that unit trusts are infallible, safe and profitable.
In the association’s 1994 yearbook, chairman Bernard Nackan says: ”Indeed, unit trusts have been reshaping the financial landscape and re-inventing the way people save.”
While there is no doubt that over the past 20 years unit trusts have outstripped growth in the Johannesburg Stock Exchange’s overall and industrial indices, the shorter-term picture tells another story.
For instance, take an affordable R100 a month investment in unit trusts and calculate the real return (compound annual growth less the inflation rate) for the past 20, 15, 10 and five years.
This figure has continually declined over the years. While the 20-year investment showed an annual real growth of 9,9 percent, the 15-year investment achieved a real return of 7,8 percent, the 10-year investment 5,7 percent and over the last five years only three percent real return was achieved.
To make matters worse, general equity trusts are heavily weighted towards industrial shares and thus bear the risk of being the most affected by a possible correction in the market.
The yearbook shows that as much as 44 percent of total funds are invested in industrial shares, with other major investments in mining financial shares (16 percent), financial shares (13 percent) and other mining shares (nine percent).
In theory, portfolio managers are able to shift funds out of any sector and place these funds into less cyclical or bearish sectors, but in reality they are hesitant to sell industrial blue chip shares.
This was confirmed by US market experts Innova Securities, in a study of the South African market.
They concluded: ”Stock in South Africa is locked up as fund managers are reluctant to dispose of significant lines for fear of being unable to re-establish positions at a later stage.”
Yet such factors seem to be ignored by the association as it concentrates on the growth in unit holders instead. Says Nackan: ”Many South Africans have entrusted their funds to our industry and today they hold over 1,37-million unit trust accounts, an increase of more than 36 percent over a two-year period.”
A look at different trusts offered in South Africa and their performance in the year to June 1994 shows that only three out of 23 general equity funds outperformed the all share index, while 10 out of 18 specialist equity funds did better than the index.
The first provides a diversification across all sectors and the second specialises in shares within particular sectors, especially industrial shares.
Whichever way one looks at it, if the industrial market falls all investors are going to suffer capital losses.
Although unit trusts may offer a safer form of investment, they are by no means immune from a stock market collapse.