South African investors have long suffered from a conservative bias. A look at the R961 billion assets under management in the unit trust industry at 31 March 2011 confirms this.
By far the bulk of the invested capital has found its way to fixed income and money market funds. These are the ‘safe’ low risk/low return options local investors prefer. It is only once we have tucked away enough money in cash and near-cash investments that we look around for slightly better risk/return options.
The second biggest pool of invested funds has found its way to actively managed asset allocation funds, where asset managers decide the optimum mix of cash, bonds, equities and listed property.
“We categorise most South African investors, especially those served by the retirement industry, as conservative with a value bias,” says Errol Shear, Absa Investments’ Chief Investment Officer. He adds that the average South African is a ‘value investor’ at heart — someone who appreciates a balanced portfolio and will take a long-term view provided their asset manager sticks with a sensible investment philosophy.
“Local investors try to preserve their capital and opt for products they can trust to pursue the same wealth-accrual objectives year after year,” he says. Equity investing has to form part of this wealth-accrual solution. The most difficult task for asset managers — after deciding on the equity route — is to determine which segment of the market will deliver optimally and then how much to commit to that segment. But the decision to increase or reduce equity exposure isn’t an easy one.
Market uncertainty and contradictory signals faced by advisers and investors have been highlighted by recent investigations at Absa Multi Management (AMM). “There’s very little consensus on domestic equity weightings in the asset management industry,” says Miranda van Rensburg, an analyst tasked with tracking fund manager behaviour, asset allocation trends and shifts in investment style. “At some asset management firms we found equity allocations in balanced funds as low as 50% while some of their peers had weightings of 75%, despite the risk profiles being much the same.”
With such wide differences in equity weightings among professional asset managers it’s not surprising private investors are uncertain. The consensus is that private investors, with assistance from their financial advisers, will increasingly lean to balanced and asset allocation unit trust funds, to defer decisions on asset classes and exposures to these classes to the asset manager. It is an important decision because the bulk of an investment portfolio’s performance is driven by the asset allocation within the fund.
Candice Paine, head of Sanlam Investment Mangers (SIM) Retail explains: “A fund’s return, generally speaking, has three sources, namely the return from the asset allocation decision, the return from being invested in the market (as opposed to cash) and return from specific security selection.”
Fees and the timing of market entry and exit also need to be considered. Nowadays these conditions are best met in a multi-asset class fund that gives you access to a fund manager’s expertise in adjusting fund asset allocation and security selection. That is why the asset allocation unit trust category has attracted more than its share of new cash inflows to South Africa’s collective investment space of late.
How do asset managers divvy up your cash to bonds, cash, shares and listed property? “We believe that markets are inefficient primarily because participants are driven by human emotions, such as fear and greed,” says Paine.
SIM relies on investor fear and greed as well as differing timeframes and liquidity requirements of major market players to create value investment opportunities in the market. How much value can the right asset manager add?
Under John Biccard, the Investec Value Fund achieved annual compound growth (in rand and after costs) of some 30%. His ‘value’ share selection strategy turned each R100 invested a decade ago into R1 400 today. Over the same period the JSE All Share managed 18.4% per annum.
Biccard says investors will have to brace themselves for more realistic returns over the next decade. “If we assume the JSE returns to a more realistic 12 times PE (price/earnings ratio) over the next 10 years then the South African market return reduces to just 6% per annum,” he says.
Biccard is also among the many local investment experts advocating a shift from local equities to carefully-selected developed market equities.