The unit trust industry has a lot of work to do if it wants to regain the trust of small investors
Neil Thomas
The unit trust industry is making much of the relative recovery in the local equities market this year. It’s doubtful, though, that investors bruised by more than two years of unit trust fund underperformance are going to fall for the “local is lekker” hard sell. True, the JSE Securities Exchange, as measured by the all share index, has performed well over the year to the end of June. The Association of Unit Trusts (AUT) was quick to point out, long before it released the official unit trust figures, that the gain of nearly 20% in the major index over the year beat all other developed and emerging markets with the exception of Russia. Nice one, comrades. But a closer look at the performance of local equity funds is not as encouraging. Over the period the average return of the 45 funds in the local general equity sector has been about 14%. This is not bad, but by no means brilliant. But hold on. This sector, the largest in the industry in terms of funds, put on more than 10% over the past quarter alone. And a longer-term view (the industry itself will tell you three years is the minimum time frame for a unit trust investment) shows an average return of only 11,5%. Now that’s not good at all and it shows why the industry needs a sustained performance to recapture the confidence of investors. I can already hear the howls from general equity fund managers. You can’t compare the all share index, with its weighting skewed towards mining and commodity stocks, with the composition of a general equity fund, they say. Of course this didn’t matter in earlier years when mining shares lagged behind the rest of the market, but it’s certainly a factor now after the long and strong performance in resources shares. And they do have a point. The mandates of general equity funds and restrictions of the Unit Trust Control Act do not allow fund managers to go overweight in the shares that make up large portions of the All Share Index. But the patchy performance of these funds over a year returns range from top-ranked Allan Gray Equity (42%) to last-placed Nedbank Harlequin (negative 25%) show the wide discrepancies in the ability of fund managers. With so many funds available and such a wide range of performance, it’s difficult for the ordinary investor to choose top-quartile performers. And many have neither the time nor inclination to do so they choose general equity funds precisely because they are meant to be an affordable, easy way to get broad exposure to the market. For this reason many investors leave the choice up to a financial adviser, who in turn abdicates the investment decision and puts the client into multi-managed and more expensive, fund-of-funds and wrap funds. Recent revelations that certain unit trust funds are being excluded by the companies that run these umbrella products are doing even more harm to the industry and have dented investors’ confidence in unit trusts. So the industry really has a lot of work to do to if it wants to regain the trust of small investors. The decent performance of unit trust funds over the past quarter is mainly thanks to the recovery of the market the same market, remember, that has been blamed for the past two years’ poor performance. It was probably only natural that the AUT and the rest of the industry should exploit the recent recovery in an attempt to derive some good PR. It was also naturally ironic that in the same week the market should again crack after the profit warning from technology heavyweight DimensionData. Last Friday alone, for instance, the all share index lost more than 1% as the large capitalisation shares tumbled on the JSE. Hopefully this is only a temporary blip in the long-awaited recovery. However, if one good thing has emerged from the drubbing investors have taken, it’s that they seem to have emerged a little wiser. The effect of investor disenchantment can be seen as funds flowing into the industry dry up, and in some cases funds are flowing out of certain sectors. Total assets under management at the end of the second quarter, according to Standard & Poors’ Fund Services, stood at more than R124-billion, an increase of more than 6% from the R117-billion at the end of the first quarter. However, Standard & Poors also points out that the average return of the industry over the quarter was 9%. So there are no new funds flowing into the industry. A lack of new funds is possibly what the industry needs to clean up its act. With yearly management fees more than doubling since fees for new funds were deregulated in 1997, costs will have to be closely watched by the unit trust management companies if they want to attract new business. The double, and even triple, layers of costs charged by wrap funds, as well as higher commissions to brokers, are unlikely to be tolerated for much longer. But it’s not all bad news. The performance of some individual funds remains outstanding. Stalwarts like Liberty Resources lead the pack over one, three, seven and 10 years. Anybody buying that fund 10 years ago would have increased his investment by nearly six times, which shows there are great fund managers in the industry and good money to be made. Resources, however, remain a special case as cyclical funds need expert timing to provide the full benefit. The extent of the run in resources has surprised, and been miscalled by, many investment professionals. But there does now seem to be a change under way in the equities market. Resources remained at the top for the first quarter, this time led by Old Mutual Mining & Resources with a notable return of 23% over the quarter. But at the top for the past month are two equity funds, Liberty Phoenix (7,4%) and Liberty RSA Small Cap (7%). Of course one month is no real measure of performance and is certainly no inducement to invest in these particular funds, but could offer an idea of what’s coming to the fore. The funds are both small cap with specialist themes, a welcome return of the special equity classes after watching the large cap shares dominate equities for so long. It’s really too early to make a definitive call, but the performance of these two Liberty funds could herald the return of small caps and specialist themes to the rankings. If correct, it’s good news for the investor prepared to take some risk when the small caps rerate, it tends to be fairly fast and dramatic. Here the Mail & Guardian must both take credit and hang its head. At the end of the previous quarter we tipped, for the brave investor, small caps and (gasp) technology stocks. At least we got one right, but that’s probably as good as being half pregnant.