Article written by Prieur du Plessis, editor of the Investment Postcards from Cape Town blog.
While the global financial crisis that reared its ugly head in mid-2007 is by no means dead and forgotten, we have fortunately seen a very strong recovery in equity prices since the March 2009 lows. “Although the MSCI World Index and the MSCI Emerging Markets Index still have to gain 31,2% and 17,1% respectively before they reach their October 2007 highs, the speed and magnitude of the recovery in equity prices have surprised many market participants,” says Dr Prieur du Plessis, chairman of Plexus Asset Management and author of the Investments Postcards blog.
“This is especially true considering the fact that the recovery has been somewhat subdued, with very little improvement in some of the important drivers of economic growth, namely US unemployment and consumer spending. On top of this the financial markets are also dealing with the still-festering sovereign debt problems in the Eurozone and other countries.”
Needless to say, what is interesting to see is where investors have been putting their hard-earned cash during these uncertain times. Did local investors benefit from the continued upside in equity markets over the past year, with another buying opportunity that represented itself in June last year, or have they remained sceptical about the rally?
Research by Plexus Asset Management, which calculates the implied in- and outflows to and from South African rand-denominated unit trust funds (excluding money-market funds) by comparing the quarter-end market values with market movements stripped out, shows some interesting findings.
Over the 12 months ended 31 December 2010 domestic funds experienced an inflow of R53,5 billion (94%) out of a total of R56,9 billion, with the balance of R3,4 billion (6%) going to foreign funds. Looking at the seven main sectors, which include domestic equity, asset allocation, fixed interest and real estate, as well as foreign equity, asset allocation and fixed interest), domestic equity funds experienced a small inflow of R2,2 billion (3,9% of the total) while foreign equity funds experienced a slightly bigger inflow of R3,1 billion (5,5% of the total). The bulk of the inflows went to the domestic asset allocation sector (R38,7 billion), while the domestic fixed interest sector was the second largest beneficiary with R8,1 billion. The only main sector to experience a net outflow was the foreign fixed interest sector with – R1,1 billion (see Graph A).
A more detailed analysis of the domestic asset allocation subsectors reveals that the prudential variable equity funds (where managers may vary their equity exposure between 0% and 75%) attracted the most inflows over the one-year period. In second place is the subsector for asset allocation targeted absolute and real return funds (i.e. funds that follow an absolute return strategy and strive to limit downside risk), followed by the subsector for domestic real estate.
In du Plessis’s opinion, this shows that investors still do not trust the equity markets and prefer a more flexible approach with managers having to make asset allocation calls, or to follow a more cautious approach. “I am somewhat concerned about the fact that money has been pouring into the real estate sector,” says du Plessis. “Investors are no doubt basing their decisions on past performance, and I am not too sure they understand the risks involved in listed property. In an environment of declining interest rates, property tends to do very well. But when the cycle turns and rates begin to rise, which may not be overnight, listed property can become as volatile as ordinary equities,” he says.
A closer look at the domestic equity sector also reveals some interesting trends. Graph B shows the implied quarterly in- and outflows to and from all domestic equity funds (including general equity and all sector-specific equity funds such as value, growth, small cap, industrial and varied specialist funds) together with the FTSE/JSE All Share Index. The graph reveals the following:
Domestic equity funds experienced net outflows for four quarters from December 2007 to September 2008. Thereafter, investors became slightly more positive and the domestic equity sector experienced net inflows for all subsequent quarters with the exception of the September 2009 quarter. “However, the inflows were subdued and even during the March 2009 quarter, when equities presented excellent value, the inflow was less than R2 billion,” du Plessis points out. “Only during the December 2009 quarter did investors commit any significant amount of money into domestic equity funds, investing just under R5 billion (22%) out of a total of R23 billion. Since then the inflows into domestic equity funds have tapered off quite significantly while the equity market continued rising. It is also evident that investors did not make use of the pull-back in equity prices during the June 2010 quarter, and we can relatively safely assume that investors are still reluctant to commit money to domestic equity funds,” says du Plessis.
No one can predict what the immediate future holds for the global economy or the stock market. “The lesson that investors should learn is that instead of wasting time staring into the crystal ball, they should concentrate on the facts and buy when value is staring them in the face,” says du Plessis.
Where have investors been placing their bets over the past year? was first posted on January 15, 2011 at 7:00 am.
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