Replacing retirement annuities

A STRUCTURAL CHANGE in the way investors perceive and use unit trust funds seems under way. That's one of the implications in the latest statistics for the third quarter ? incidentally, a record three months for the unit trust industry as net inflows reached nearly R20bn. The large inflow, R19,8bn to be exact (pushing total assets under management to R496bn), is a great vote of confidence from both retail and institutional investors in the merits of unit trusts. But even more important is where that new money is going - certainly not into the general equity funds, the traditional cornerstone of the industry when unit trusts were perceived as little more than a convenient investment vehicle for a moderate monthly debit order. Association of Collective Investments (ACI) CE Di Turpin is probably right when she notes the inflows suggest "investors are bullish on the outlook and don't seem overly concerned about the short-term prospect of rising interest rates". Two trends are noteworthy: both retail and institutional investors pumped money into unit trusts, the former a large R13,3bn, twice as much as institutional flows. That's significant, as it's not that often that retail and institutional investors do the same thing. Typically, it's a case of the so-called smart money (institutional) moving first, with retail investors following and not always getting the full benefit. Now it seems as if retail investors are leading the pack. Second, as Turpin notes, investors seem less concerned about shorter-term volatility on the market, as they continue to select lower risk and fixed interest investments. Part of that could be due to far more cautious financial advisers under more stringent regulations. But it's also likely that unit trusts are increasingly being used to supplement or even form the core of retirement savings, a very visible sign of unhappiness with retirement annuities after last year's fallout. Turpin takes the popularity of asset allocation unit trust funds (that employ all asset classes, with the manager making the asset allocation decisions) as a sign of "increased interest in collective investment solutions for retirement funding, with more funds being selected as underlying vehicles in retirement annuities". Unit trust-based retirement annuities have always been around, but not really marketed vigorously and mostly not sold by brokers because they didn't carry lucrative upfront commissions. But that's slowly changing, as asset mana-gers such as Allan Gray and Coronation move into that area, offering pure unit trust retirement annuities. But there could be more in the trend towards more cautious investments. It's not inconceivable that some retail investors are starting to make their own decisions on supporting a company pension fund and choosing unit trusts in favour of retirement annuities. Results from the life insurance companies suggest that sales of retirement annuities are down and under pressure, sales of unit trusts are up. More worrying, perhaps, are some typical top-of-cycle signs coming through. The number of unit trust funds has increased from 679 to 707 over the quarter. But offsetting that is an apparent lack of interest in straight equity funds. Although a detailed breakdown of inflows and outflows wasn't available at the time of writing, a rough calculation suggests an outflow close to R600m from equity funds. One surprising feature was a fairly strong inflow of R855m into bond funds, particularly compared to the outflow of R7,8bn in the previous quarter. What's changed the perception of SA bonds? Henk Viljoen, head of fixed interest at Stanlib, has some ideas. He says it's partly due to low bond issuance by the Government, roughly R4bn/month, which is similar to two years ago "because the tax authorities are hauling in so much money". And Viljoen says that SA bond yields are attractive: 8,67% on the 10-year gilt, compared to 1,7% in Japan and 3,7% in Europe. Another future development by the ACI is the introduction of total expense ratios on unit trust funds from next year. That's basically a portfolio's assets less operating costs expressed as a percentage of the average value of the portfolio. Currently, investors can see management fees and how those are split between the various parties. But there are other costs that are taken out of assets in the portfolio, not seen by the investor and affecting the fund's performance. Apart from the usual management and admin fees, those can include custody, trustee, audit and bank charges, as well as taxes, brokerage and stamp duty. Turpin says that total cost disclosure and the ratio will allow investors to track a fund's expenses and directly compare various financial services products. No doubt there will be moans from some product providers that cost ratios between some funds aren't directly comparable, but that's little more than an excuse and they'll probably have to get into line. The first total expense ratios should be available to investors from 1 April next year.