A noteworthy shift is occurring in South Africa’s unit trust sector. Although some larger asset managers are experiencing modest outflows, mid-sized managers are seeing substantial inflows on the back of strong performance. Investors are also gravitating towards balanced and multi-asset portfolios, showing a growing preference for ESG-compliant funds and domestic equity. This trend is also evident in the move towards domestic equity within the listed property sector, reflecting both evolving market dynamics and the performance of managers in these spaces.
Flows into the unit trust sector remained relatively strong before the Covid-19 pandemic. As the pandemic unfolded, investor sentiment took a hit, leading to a slowdown in new investments. According to the Association for Savings and Investment South Africa, there has been a downward trend since then, with the most recent data, for the second quarter of 2024, showing a net outflow of R6 billion in assets for the period. The industry as a whole remains substantial, with R3.4 trillion in assets by the end of the second quarter of 2024.
Read: Unit trust outflows hit R6bn, but market performance pushes AUM higher
This indicates that the investment climate in South Africa has been subdued. However, it’s important to note that the data reflects the period leading up to the election, when caution was high. Since then, the equity market has improved, and it is expected that investment flows will recover as political uncertainty eases and anticipated interest rate cuts come into effect, likely boosting sentiment.
There are also sector-specific nuances to consider. Unit trust categories vary, encompassing high, medium, and full equity, property and cash mandates. Notably, the multi-asset space remains highly favoured, with funds that can invest in a diverse range of assets – locally and offshore, including fixed income and equities – continuing to attract significant attention.
Following closely behind is the equity general sector, where managers solely focused on equity mandates have shown solid progress. Interestingly, during the period of economic and political uncertainty, there was minimal investment in long-term focused mandates, which include some equity exposure. The preference leaned heavily towards interest-bearing mandates, reflecting the prevailing concerns.
The unfortunate truth is that, despite the recent market recovery, many investors remain heavily invested in fixed-income or fixed-interest assets. This highlights the importance of maintaining a long-term investment strategy, because it is impossible to predict exactly when equity markets will rebound.
Wealth managers who encourage clients to adopt a long-term perspective and remain invested in mandates aligned with their risk profile, even if they have slightly more equity exposure, are providing valuable guidance.
The rise in flexible categories and offshore equities also reflects the growing tendency of investors to seek international opportunities or hedge against domestic market volatility.
Flexible funds, as their name suggests, allow for greater adaptability, enabling managers to adjust their asset allocation in response to changing market conditions. This strategic manoeuvring can range from conservative positioning to more aggressive stances depending on the economic landscape, offering a safeguard and potential upside in uncertain times. It is a clear sign that investors are prioritising both diversification and a degree of protection in their portfolios.
Factors affecting short-term performance
Taking a step back there are two main factors influencing short-term performance. First, changes to Regulation 28, which dictates the offshore exposure limits for retirement funds, have substantially increased offshore limits over the past two decades. Investors who allocated significant capital to offshore equities during this period generally saw better returns.
However, there has been a notable shift recently. Over the three months to the end of August 2024, South African bonds have outperformed all other asset classes, delivering a 12% return, followed by South African equities at 9.6%. Global equities, in contrast, lagged with a modest 0.6% return. This highlights the importance of portfolio diversification and timing. Investors who stayed heavily invested in offshore assets might be seeing a reduction in alpha gained in previous cycles as local asset classes regain traction.
Going forward, a stronger focus on the local market from fund managers is expected, and we are already seeing early signs of this shift. The equity sector has displayed a notable divergence in performance across industries. Financials, for example, surged more than 27.2% in the past three months, while resources took a hit, falling by 8%.
Performance is not only just about individual managers; it is about their sector positioning. Financials and particularly property, which has climbed nearly 20% in three months and nearly 40% over the year, have been key drivers. These sectors, traditionally considered “SA Inc” stocks, have been out of favour for years. However, recent returns confirm that our belief in their long-term value is paying off.
Additionally, the currency played a role: the rand strengthened by about 6% to the US dollar since elections in May 2024. Managers who leaned into local value, shedding expensive offshore assets, have benefited from this shift.
Navigating rand-hedge stocks has also been tricky. Traditionally, these assets have provided a cushion when the currency weakens because of negative news. However, with the rand strengthening, many of these hedges have underperformed, creating a more challenging environment.
Overall, we are seeing managers pivoting toward the domestic market over the medium term, dialling back offshore exposure, and favouring cyclical sectors that are benefiting from the current environment.
Ultimately, it is important to seek advice from a trusted financial adviser to help you navigate these changes, ensuring you are positioned to benefit from the shift in the investment landscape and that you remain on course to achieve your financial goals.
Adriaan Pask is the chief investment officer of PSG Wealth.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute investment or financial planning advice that is appropriate for every individual’s needs and circumstances.
