Figures released this week the Association of Savings and Investments of South Africa (Asisa) show that 63% of assets managed by the domestic unit trusts industry now sit in fixed interest and money market investments.
Inflows into pure equity funds accounted for only 4% of net inflows into unit trusts for the second quarter of this year.
Leon Campher, head of Asisa, is sounding alarm bells. He believes investors are taking a short-term view of market risk when the real risk is the long-term impact of inflation on their retirement funds.
Apart from jeopardising long-term performance, Campher said when money is invested in fixed interest or money market funds it remains very accessible to investors and is often then used to finance consumption. By investing in a long-term equity linked investment, investors are less likely to tap into their savings.
Money market unit trusts accounted for R7,7-billion of inflows in the second quarter of this year and fixed interest funds (income and bond funds) accounted for R3,9-billion.
Together they accounted for half of the inflows into domestic equity unit trust funds.
Asset allocation funds such as balanced funds and absolute funds took the lion’s share of inflows at R8,7-billion. Financial advisors and fund managers are reporting that that clients are just too nervous about investing in equities and prefer to hand the decision of the asset allocation (between equities and fixed interest) to fund managers.
The concern however is that investors are selecting asset allocation funds with low equity exposure so that even if the fund manager is positive about equities he or she cannot invest more than 50% of the assets into equities. This will have a material impact on long-term performance.
Over the last five years low equity prudential funds have delivered performances in line with fixed income funds at 9%. High equity prudential funds have delivered 14% performance. That equates to a 28% difference in performance over five years which includes on the worst market crashes in our history. Over 10 years the investor will have sacrificed 63% in potential returns.
Campher says consumers continue to believe that stock market volatility is the biggest enemy of their retirement capital, while it is actually inflation they need to fear. “As a result we see investors being so defensive in their investment strategies that they sacrifice future inflation beating growth for immediate stability and peace of mind.”
This is particularly true for retired investors. “If as a pensioner you are supporting your current income by sacrificing the future growth potential on your capital, you are allowing inflation to whittle away the very capital that is meant to sustain your income for years to come,” said Campher, who adds that real long-term growth can only result from a well-balanced investment portfolio, which includes equities.
This, he said, is true for pensioners as well, given that many will spend almost as much time in retirement as they did building their careers.
“Investors who want to achieve inflation beating returns over the long term must learn to maintain a steady equity exposure as part of a well diversified portfolio. Construct a solid, well diversified portfolio with a trusted financial adviser and then learn to sit out the bad times.”
Unit trust statistics:
- The South African CIS industry recorded net inflows of R83-billion in the year ended June 30 2010, bringing assets under management to R789-billion.
- The net inflows for the second quarter amounted to R24,2-billion.
- Domestic asset allocation funds attracted the bulk of these flows — investors placed a total of R8,7-billion into these funds.
- Domestic money market unit trust funds took R7,7-billion, while other domestic fixed interest funds received R3,9-billion. Only R855-million was invested in domestic equities.
- During the second quarter of this year investors took advantage of the stronger rand and rushed some of their offshore allowances into locally registered foreign funds. As a result these funds recorded new inflows of R4,2-billion, the highest ever per quarter.
- At the end of the second quarter this year the industry offered 919 funds.
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