Uncertainty in the markets is pulling private investors hither and tither, writes Shaun Harris
Pity the private investors. They are being pushed and pulled from different directions and are clearly finding it difficult to take a view on where to invest their money.
That seems the only plausible explanation for the trends emerging in the latest results from the unit trust industry, for the quarter to the end of September. Doing the pulling are unit trust management companies, with fund managers telling investors everything is alright and that the outlook remains good for growth in equities.
Pushing in the opposite direction are chill winds from Wall Street, warning of a possible global correction in equity prices – and, more pertinent to local investors, the fear of Y2K and what it might mean for share prices.
The result has been a flight to money market funds or outright retreat from unit trusts. The professionals will try to put a brave face on it, but unless the trend of weak net inflows into unit trusts is reversed, the industry is heading for trouble.
Net flows into unit trusts of R3,9- billion is static, virtually the same as the R3,8-billion of the previous quarter. This can be compared with net inflows of R12,7-billion in the first quarter of the year.
Repurchases – unit trust management companies buying back units from investors – remain high at R17,9-billion, although the Association of Unit Trusts says this represents investors switching between funds in search of better performance or moving to the low-risk environment of money market funds.
These funds were the centre of activity over the past quarter, attracting R3,7- billion, 41% more than the previous quarter, and now making up 28% of total industry assets of R93,9-billion. In contrast, the traditional equity funds only brought in R181-million which, despite a lot of upbeat forecasts for the local market, seems to sum up the attitude of investors.
The problem with trying to interpret the strong move into money market funds is that the bald figures don’t reveal who is doing the investing. High repurchase figures could be individual investors moving from equity to money market funds or the institutions coming into these funds as they increase liquidity. Investors who sold their units may have moved out of the unit trust industry completely.
Sidney Place, chief executive of Liberty Asset Management, says preliminary research on GuardBank repurchases seems to indicate that many people need cash, maybe to pay off debt. This cash squeeze, he says, coupled to the uninspiring performance of unit trust funds in general, may have investors moving out of the industry.
Yet the industry continues to push out new products. Fifteen new funds were launched during the quarter, bringing the total to 240 unit trust funds. A year ago the total stood at 186 funds – one wonders how long weak inflows of cash can support the growing number of new products. Expect a wave of consolidation in the new year, driven in part by the reclassification of unit trust sectors.
Looking at the equity funds, the clear winners were the mining and resources funds. They’ve gained an impressive average of 89,4% over the past year. The question now is how much longer commodities can keep running.
Gold funds led the charge, sustained by the surprise uptick in the gold price. There are only two funds in the sector. Old Mutual Gold came in first over the quarter with appreciation of 33,6%, followed by Standard Bank Gold at 32,5%. However, the extremely cyclical nature of these funds is apparent when you consider that over the year the Old Mutual fund returned 40,3%. The gold price is just too volatile to factor into the planning for the average private investor. Resources and non-gold mining have clearer cycles, and most fund managers believe the fundamentals are in place for commodity prices to keep firming and the run in share prices to continue.
Dave Tunnington, who jointly runs Old Mutual Mining, sees share prices in these sectors continuing to appreciate into next year, possibly the second half of the year.
Dirk Kotze, portfolio manager with Coronation Asset Management, believes there is at least another year left in the cycle. The short-term risk, he says, is that earnings forecasts are discounting a much weaker rand which, if it remains strong, means the forecasts will disappoint investors. The biggest risk to the commodity cycle is “the bubble trouble in the United States market”.
Patric Ho, from Fedsure Value Fund, says the fund’s trading activity “reflects the view that resources have not yet peaked and cyclical industrials will outperform the defensive counters”. The fund has been making new investments in resources, including De Beers, Sasol and Sappi, although it switched out of Anglovaal Mining.
But the problem with these funds is that they only represent a small portion of the industry – about 17% of the domestic equity fund total assets. So strong performance here is not an indicator of general market performance and not a sign of the health of the industry.
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Fanie Lategan, chief executive of Sanlam Unit Trusts, says the strong rise of 34% in the Johannesburg Stock Exchange’s (JSE) all share index over the past year was due mainly to the performance of a few sectors, principally gold and commodities, and was spread over a relatively small number of shares. “This increases the investment risk,” he says.
The problem for smaller investors who are in these funds remains when to call the top of the cycle and get out. That’s a decision that even professionals find difficult. And buying resources funds is not typical of the usual, longer-term investment pattern that people buy unit trusts for. Buy-and-hold strategies are no good here – investing in resources is a cyclical game, a short-term strategy that needs considerable expertise.
One positive trend was the reversal of outflows from the large equity funds to an inflow of R27-million over the quarter. But again it’s hard to tell whether this represents some investors taking a more bullish view of the market in general or whether it’s people disillusioned with the poor performance of growth and small companies funds switching investments. Returns here for the year were 5,1% and a negative 12,1% respectively.
The pity is if forecasts are correct and the JSE is in for a bull run, these two sectors, where prices have been hammered down over the past year, will probably be among the best performers. Both must eventually start to benefit from lower interest rates. It looks like a classic case of investors selling at the bottom of the market.
And while investor nervousness is perhaps understandable, the same applies to those taking refuge in money market funds. There are risks, mainly from the US, that could push prices down further, but if anything this should be a buying opportunity. Investors taking a wait-and-see attitude could well find they have missed a large part of the run when they return to equities next year.
One investment professional who holds this view is Peter Linley, investment head of unit trusts at Old Mutual Asset Managers. He says investors should remain in equities and resist the temptation to switch into cash. “In spite of current market conditions, we expect equities to beat the returns on cash over the next 18 months by a wide margin,” he says.
Linley believes the market is seeking a trigger to start the next leg of the bull run. “If the fallout from Y2K turns out to be not as dire as some investors fear, the market will in all likelihood move sharply ahead and they may find that they only re- enter the market at far higher levels. “Instead I would recommend that investors maintain a well-diversified portfolio constructed around their individual appetite for risk,” he says.
But it doesn’t seem that many investors are taking this approach from the past quarter’s results. What’s clearly missing at the moment is investor confidence – the year-end changeover appears to have got the better of investors’ nerves.