South African investors are far more risk averse than their foreign counterparts, with only 19% of local collective investment scheme (CIS) assets in equity portfolios compared with 47% for all international CIS assets, says Sunette Mulder, the senior policy adviser at the Association for Savings and Investment South Africa (Asisa).
She referred to statistics from the International Investment Funds Association (IIFA), which showed that nearly half (47%) of South African assets were in balanced funds (multi-asset portfolios) compared with 12% internationally at the end of September last year. (The IIFA’s figures lag those of the Asisa by a quarter.)
South African investors had 5% in bond funds compared to 20% for global investors.
South African and foreign investors both allocated 12% to money market funds, while 11% (9% globally) was in “other funds”.
Interest-bearing funds grow in popularity
Over the past five years, investors’ allocations to portfolios in Asisa’s domestic (excluding global, worldwide and regional) CIS sectors have remained relatively static. At the end of December 2016, equity funds held 20% of assets, while it was 19% at the end of December last year.
Allocations to real estate funds have fallen from 4% to 2%, according to Asisa’s statistics.
Investors have reduced their allocation to multi-asset funds, from 51% to 48%, while increasing their allocation to interest-bearing funds, from 25% to 31%.
Within the multi-asset sector, only the income sub-category has experienced growth over the past five years, from 7% to 10%. Flexible funds are unchanged at 3%. Allocations to the low-equity (from 13% to 9%), medium equity (3% to 2%) and high equity (25% to 24%) sub-categories have declined.
The popularity of interest-bearing funds saw allocations to variable-term portfolios increase from 3% to 6% and allocations to short-term portfolios increase from 6% to 11%.
Allocations to money market funds fell from 16% to 14%. However, it should be borne in mind that South Africa’s biggest money market fund, the R80 billion Absa Money Market Fund, closed in the second quarter of 2021, which resulted in the money market sub-category recording a net outflow of R74.5bn for the 12 months to the end of December.
Are these allocations appropriate?
The question is whether these risk-averse allocations are appropriate for investors’ financial needs or is investors’ fear of volatility preventing them from participating in outperformance?
Although long-term investors (20 years) would have beaten inflation (5.4%) no matter the category in which they invested, the downside is that those in a South African equity general fund would have earned an average annual return of 13.4% (according to Profile Data), whereas those in a variable-term fund would have earned 9.3% – although better than the 8.1% from a global equity fund.
Unsurprisingly, investors in money market funds fared worst: earning only 7.1%.
Over five years, investors in variable-term funds received an annual average return of 8.1%, outperforming South African equity funds, which returned 7.9%.
But the sector to be in was global equity, which returned 15.3%
The returns for the other interest-bearing sub-categories were 7.2% from short-term funds and 6.4% from money market funds – only two percentage points higher than inflation over the period.
In the multi-asset sector, high-equity funds returned 8%, income funds 7.3% and low-equity funds 7.2%.
Muted inflows in 2021
The South African CIS industry ended 2021 with R3.14 trillion in assets under management (AUM), compared with R2.73 trillion at the end of last year.
Mulder said AUM topped R3 trillion despite muted net inflows of R56.3bn for the year to the end of December 2021. In 2020, the industry had net inflows of R213bn.
She said the closure of the Absa Money Market Fund had a significant impact on the industry’s total net inflows last year.
The South African interest-bearing variable-term sub-category recorded net inflows of R29.7bn. Investors in these funds earned an average return of 9.5% last year, while the average inflation rate was 5.9%.
The second-most popular sub-category was global equity general, which attracted R24.6bn in net inflows. The sub-category returned 22.9%.
The South African equity general sub-category attracted only R9bn in net inflows, despite delivering a strong average performance of 28%.
Investors in short-term and money market funds earned below-inflation returns of 4.7% and 3.9%, respectively, last year.
The number of domestic portfolios continued to grow last year, from 1 686 to 1 710.
Locally registered foreign portfolios held assets under management of R698bn at the end of December 2021, compared to R562bn at the end of the previous year.
There are 592 foreign-currency-denominated portfolios on sale in South Africa.
Where did the money come from?
Mulder said 25% of the inflows into the CIS industry last year came directly from investors. However, she pointed out that some of these investors may have implemented investment decisions after receiving financial advice.
Intermediaries contributed 38% of new inflows in 2021. Linked investment services providers generated 20% of sales. Institutional investors contributed 17%.
The fact that only 19% of local collective investment scheme (CIS) assets are in equity portfolios, compared with 47% for all international CIS assets, does not necessarily imply that SA investors are more risk averse. It might possibly simply indicate that for overseas investors, it is perhaps much easier to invest directly on bonds and other interest bearing or predominantly income generating investments? Thus, maybe the typical overseas investor invests directly in his/her interest bearing investments like bonds, and only uses unit trusts (or mutual funds) for his/her equity investments? I don’t know whether or not this is so, but I believe there is a reasonable probability that it might be so. Also, many SA investors might decide to invest in only one unit trusts, to keep admin costs down and to comply with minimum investment criteria. If they choose only a single unit trust then it would often make sense to use a balanced (multi-asset) fund to still get diversification.