Johannesburg – Unit trust investors' love affair with fixed income instruments is still steamy.
Fixed interest funds received R20.3bn of the net R29bn invested in collective investment schemes (CIS) in the third quarter this year, new figures from the Association for Savings and Investment South Africa (Asisa) show.
Money market funds alone attracted R13.3bn.
Unit trusts invested in domestic equities have had a bad quarter when looking at inflows, said Asisa CEO Leon Campher.
Despite solid returns from the stock market – the JSE's All-share index returned 13.3% in the third quarter alone - many investors do not want to risk losing their capital in volatile times.
Funds invested in shares managed to attract only a negligible net inflow of R32m in the third quarter.
Yet the domestic general equity sector outperformed the domestic fixed interest and asset allocation sectors over a year as well as over the five years ended September 2010, said Campher.
General equity funds, on average, delivered a return of 17% for the year to end-September and 13% over the past five years.
Money market funds returned 7% for the year and 9% for the five years.
Campher blamed a bout of volatility in the stock market at the end of the second quarter for "spooking" investors and keeping them out of shares.
There is growing concern that by playing safe, investors may miss out on the inflation-beating growth shares have traditionally offered.
While inflation is still benign, electricity price hikes and big wage increases look set to bump up prices and investments will have to grow much harder to ensure spending power isn't eroded.
Money market funds may make sense to some clients, said Craig Gradidge, director and founder of Gradidge-Mahura Investments in Sandton.
For corporates moving money from a call account to money market funds may earn them between 3% and 5% more a year – without giving up liquidity.
The tax benefits may also be appealing.
Assuming an average return of 6.5% from money market funds at the moment, investors over the age of 65 can invest as much as R1.5m before they start paying tax on the interest they earn.
For investors under the age of 65, that falls to just under R1m.
"The reality, though, is that there are still a number of investors in money market funds that should not be invested in those funds," said Gradidge.
"These investors typically focus on capital preservation as a primary objective which can be damaging over the long term, especially once the effects of inflation kick in."
Protection vs purchasing power
For example, investors in money markets over the past 10 years have lost about 45% of the purchasing power of their investment as a result of inflation over the period.
They have protected capital, but not the purchasing power of their capital.
Capital growth remains the most effective protection against the effects of inflation, but it does mean taking on some risk.
Despite volatility, shares traditionally offer a much greater chance of capital growth.
But, says Campher, investing in stocks should never be made with an "all or nothing" approach.
"Equities should form part of a well-balanced portfolio that mirrors the investor's risk profile and takes into consideration the investment objectives," says Campher.
Unfortunately, said Campher, this is not happening enough.
"When we look at historical statistics, we see that there has been little balance for a number of years. For the greater part of the past five years, investors have preferred money market funds over equities.
"This means most investors missed out on a massive equity bull run, which only slowed towards the middle of 2008. The saving grace for many investors was the fact that we were in a high interest rate phase. But this is no longer the case and investors can no longer count on high interest rates to protect them against inflation."
Despite indications this week that interest rates look set to move even lower following the release of anemic inflation numbers and Treasury stating that monetary policy will be used to weaken the rand, it is not expected that investors will warm to funds invested in shares soon.
However, Gradidge anticipates they may slowly start taking on more risk.
"We should start to see investors moving up the risk curve to income, enhanced income and real income type funds over the coming months, especially if interest rates fall further. RSA Retail Savings bonds are also becoming a more compelling option as the spread in rates increases between these funds and money market funds," he says.
- Fin24