Written by: Candice Paine

Cape Town, 1 February 2012

The tough economic climate was reflected strongly in the 2011 unit trust results released by the Association for Savings and Investment South Africa (ASISA) today. The industry had its worst year in six years and saw a 55 percent decline in flows from R101 256 million in 2010 to R45 424 million in 2011. The size of unit trust market now stands at R1 011 052 million at the end of 2011 (including offshore funds).

Candice Paine, Head of Retail at Sanlam Investment Management says that individuals have been 'de-saving' either by spending - quite likely on needs rather than wants - or paying off debt. Lost employment would also no doubt have contributed in her view. "Consumers are increasingly under stress in terms of their personal money management and they have to cut back on savings in order to meet more immediate needs."

Corporates, on the other hand, have been deleveraging since 2008 are now looking to spend on capex and emerge from 'lock down'.

Paine said that the big surprise in the latest stats was the R21 153 million outflow from money market funds. "Money market funds have had inflows of on average approximately R30 billion per annum over the past five years. The outflows, therefore, represent a substantial shift in investor behaviour. It is possible that investors may have moved some of their money to higher yielding funds which carry slightly more risk than money market funds, for instance, income funds (which saw much bigger than usual annual inflows) and fixed interest varied specialist funds. But mostly it is likely that the withdrawals from money market funds have left the industry entirely for the reasons mentioned earlier."

She said that a strong trend seen over the last few years had persisted in the latest set of results. "Multi asset class funds were the biggest recipients of flows as investors are increasingly opting to choose the level of risk they are comfortable with and then leaving the asset allocation decisions to a professional fund manager. This category includes Balanced Funds, Low Equity Funds and Targeted Return Funds."

Property funds which have been the darling of income investors over the past few years saw a dip in netflows receiving R2 140 million which is a more than 50% drop from 2010. Dividend Income funds, housed in the Fixed Interest Varied Specialist Category, lost approximately R16 billon as a result of an impending tax legislation change on their structures. "However funds offering the opportunity for investors to receive enhanced yields are still very popular."

Pure equity funds are still not flavour of the month with specialist funds and value and growth funds being even less popular than general equity funds - this is further confirmation of investors leaving asset allocation to professional fund managers who will not only allocate capital away from equities when valuations dictate but also employ protection strategies which give an investor further peace of mind in times of high volatility.

Paine said that within the global context, emerging market equities were one of the worst performing asset classes globally in dollars, with global bonds, surprisingly, performing the best. "This reflects the risk-off trade as investors fled to perceived safety and reacted to newsflow and not valuations."

In terms of international fund flows, the most noteworthy development was the tapering of netflows into Rand denominated foreign unit trusts in 2011.

She says that individuals who can afford to continue to save should do so for as long as possible, but they should see good advice about where to invest in this market. "Asset managers are in a difficult spot. The perceived risk in risky assets is very much higher than safer assets, but the traditional payoffs aren't aligned. So fixed interest assets are giving their lowest yields in many years and the superior returns we've seen from equities through most of the noughties will take a while to be replicated owing to the global growth environment. Investors who are drawing an income from their capital require a high absolute level of return to draw what they need and this implies that they need to be taking on more risk. But with caution."

Paine - under whose watch SIM retail asset under management increased 84% in just three years - concludes that, despite the environment, Sanlam Investment's focused retail strategy had meant that it had one of its best years ever. The investment cluster was the recipient of over R7 000 million netflows in 2011.