/ 13 May 2011

Solving SA’s savings dilemma

The South African Reserve Bank Quarterly Bulletin (March 2011) reveals that the country’s gross household savings rate is a mere 1.5% of GDP.

In stark contrast, countries such as China, Japan and Turkey achieve rates in excess of 20%. Why does South Africa lag so far behind? Peter Dempsey, deputy CEO of the Association for Savings and Investments South Africa (Asisa), believes the high level of unemployment is a major contributor to our poor household savings performance. Statistics SA confirms the country’s endemic unemployment situation in its Labour Force Survey, Q1 2011, with the official unemployment rate once again topping 25%.

“Economic conditions have an impact in terms of driving down savings rates,” says Dempsey. “But one of the root causes is that, for a large part of the population, saving is very difficult to achieve.” Another way to understand the savings conundrum is to consider how households save. At the simplest level we have community ‘stokvels’ (an informal group savings scheme); Mzanzi bank accounts; and ordinary bank accounts, including a wide variety of notice and fixed deposits.

Further up the financial product ladder we find the likes of RSA Retail Bonds, unit trusts and direct equity market investments, including ordinary shares, exchange traded funds and derivatives. The formally employed make extensive use of pension and provident funds and retirement annuities to meet their long-term savings needs.

According to the Reserve Bank, March 2011, deposits at banks and mutual banks by residents of South Africa total R2.228 trillion, meaning banks still hold the lion’s share of short-term savings. Pension funds are a close second with the latest Financial Services Board (FSB) statistics suggesting South Africans have ‘stashed away’ R1.3 trillion across some 3 500 pension funds.

A further R1 trillion is administered by the Public Investment Corporation (PIC) on behalf of the Government Employees Pension Fund. And CIS statistics for the first quarter of this year, released by Asisa, confirm that the assets under management in the unit trust industry total R949 billion as at 31 March 2011.

Unit trusts have become extremely popular among private savers. From humble beginnings in 1965 when the first unit trust fund was launched, the industry has grown to 934 funds today. Going forward, market commentators expect the number of distinct fund offerings to decline.

There are two main factors driving consolidation in the unit trust industry. The first centres on the ability of financial advisors and investors to understand the sheer range of funds on offer. And the second centres on the increasing cost of regulatory compliance. Fund managers must attract enough assets under management to make their offering financially viable.

“Unit trusts were established to enable the average individual investor to access the stock market by addressing obstacles to entry to the market, including high minimum account levels at stock brokers, inhibitive ‘blue chip’ share prices and accessibility issues with online services,” says Dempsey.

And savers can now structure a unit trust portfolio to match their precise risk profile, selecting from conservative money market and fixed income funds on one end of the scale, to specialist global equity funds on the other. That’s why an increasing number of investors are placing their discretionary savings directly with unit trust companies.

Over the past year the bulk of the investments into the industry were channelled via financial intermediaries on behalf of savers (36%) or directly by savers (30%). A further 21% of inflows came from linked investment services providers (Lisps) and a mere 13% from institutional investors such as pension and provident funds.

Lisps attract a large amount of discretional non-pension savings too. Although market commentators welcome the flood of discretionary savings to the unit trust industry, they warn against saving for savings’ sake. Of the R107 billion flowing into the industry over the past year, R61 billion found its way to the domestic fixed interest sector — invested in conservative money market, bond, income and varied specialist funds.

The domestic asset allocation sector attracted R37 billion and equities a mere R4 billion. Local savers’ penchant for low-risk investments places a ‘cap’ on their long-term returns. “While equity investments carry a higher risk and are more volatile, they have consistently outperformed fixed interest and inflation over the long-term,” notes Dempsey.

Savers can maximise their returns by striking the correct balance between cash, bonds, equities and listed properties. Commenting on the R37 billion flowing into the asset allocation sector, Candice Paine, Sanlam Investment Managers (SIM) Head of Retail, says investors must be realistic about their long-term return expectations from multi-asset class funds.

“You can reasonably expect different asset classes to deliver a range of long-term real returns,” she says. “While it is possible to increase the performance of these asset classes through security selection and tactical asset allocation, to achieve superior returns you need to identify a fund manager who has consistently excelled in these two respects — not an easy task!”

The recent flows of discretionary savings suggest that investors prefer the relative safety of a multi-asset class strategy over direct equity investing. “Equities inevitably tend to comprise a significant proportion of any multi-asset class fund given the greater probability of this asset class outperforming inflation — thus offering superior real returns — in the medium to long term,” says Paine.

Asset allocation funds with high equity exposure tend to be more volatile, while targeted or absolute return funds focus on managing downside risk. The unit trust industry is playing an increasing role in the South African savings landscape.

It will be up to the National Treasury, the Financial Services Board and organisations like the SA Savings Institute and Asisa to educate ordinary citizens on the importance of saving, and inform them of the array of financial products available to meet their savings’ goals.

This article originally appeared in the Mail & Guardian newspaper as a sponsored feature