If you weren’t in a unit trust with a heavy resource weighting, you probably missed the 1999 JSE boom, writes Neil Thomas
The bull caught investors off guard in the final quarter of 1999, driving share prices and the Johannesburg Stock Exchange’s All Share Index (ASI) to a new high, but leaving most general equity unit trust funds out in the cold.
That’s the story to emerge from the latest unit trust figures, a sad tale of how most investors missed the benefits of what for the year turned out to be a rampant market.
Over the year to end-December 1999 the ASI climbed by a very respectable 61%, a large part of that gain only coming in the final month of the year.
But you won’t find many satisfied unit trust investors. The more cautious switched to money market funds, a safe haven but relatively dismal performer compared to the overall equity market.
Over the final quarter of the year 61% of gross flows went into the money market sector, compared to only 30% into equity funds and 9% into bond funds.
Therein lies the contradiction. In a year when the Johannesburg Stock Exchange (JSE) was a star performer in global terms, the large majority of unit trust investors did not fare well.
Only those who had the foresight, or plain good luck, to get into mining and resources or index funds enjoyed part of the market’s strong run.
Global funds were also sound performers, but the problem here is that a number remain closed to new investments, having reached their asset swap ceilings.
About the only comfort individual investors can take is that most unit trust fund managers, the professionals paid handsomely to get top performance, got it wrong as well. Only 10 funds, seven of which were in resources, managed to beat the ASI. The general equity funds bombed out.
But for investors who did not sell or switch funds, the good news now is that this promises to be a much better year for equity unit trusts. General equities, now better positioned for the bull run through some desperate buying and selling by fund managers late last year, should enjoy what looks like the promise of a sustained climb in the market. Those specialist funds that did so badly last year – the smaller capitalisation IT funds and financial services – are again looking good.
The late market surge provided a strong final quarter for the unit trust industry. Association of Unit Trusts (AUT) executive director Colin Woodin says net inflows of R5-billion over the last quarter resulted in a record R112-billion assets under management for the industry by the end of 1999. Strong inflows have continued as investors, dispensing with Y2K concerns, return to unit trust funds.
Pieter van Niekerk, managing director of Old Mutual Unit Trusts, says the year was characterised by investors looking back instead of forward and “overblown concerns about Y2K.
“The industry saw little net new investment, with many investors electing to pay off their bonds. Industry gross sales ran at six times net sales as investors changed around their fund portfolios.”
However he believes the unit trust industry will grow strongly this year, with the JSE expected to continue to show an excellent performance.
“We are anticipating strong inflows into our equity funds after 1999 saw short-term investment focused on low-risk money market funds,” Van Niekerk says.
It’s notable, he adds, that South Africa has been rated as the emerging market with the best prospects by Merrill Lynch in its fund manager survey. “That will improve JSE sentiment,” he says.
A number of new developments are expected this year. These include direct Internet sales of unit trusts, which Van Niekerk believes will take off on the back of aggressive discounting of upfront fees.
Further rationalisation among linked product houses is also expected, and a further increase in competition as the smaller players in the industry push for higher marketing profiles.
AUT chair Anton Kok is upbeat on prospects for equities, saying market fundamentals are the best they have been in a number of years. This should bring some of the shine back to general equity unit trusts as a medium- to longer-term investment.
Favoured sectors are information technology, small cap funds and the banks, though cynical investors will note these were also the popular sectors a year ago.
A number of fund managers believe the asset swap ceiling on offshore investments will be raised over the first half of this year, and that the individual investor allowance will be increased from its current R500E000. This should be used by investors for longer-term diversification, but not for expected short- term gains.
Investors who went offshore last year in the hope of benefiting from a declining rand did not do well. And there seems a strong chance that the local market will outperform general global funds this year.
It’s likely the JSE will slow over coming months. But failing a market correction – not out of the question – local equities are the place to be.
Lower interest rates are finally feeding through to a number of sectors on the JSE.
So now is the time to take advantage of the interest rate cycle in South Africa, while rates are set to increase in both the United Kingdom and on American markets.
That might take a leap of faith from local investors after the experience of last year. It’s time to put pressure on South African fund managers – many have little excuse but to perform well this year.