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Investors shun equity investments

Aug 03 2010 10:56

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Johannesburg - The same short-term outlook preventing South Africans from saving is probably also keeping the majority of investors out of equity unit trust funds and in fixed interest collective investment schemes, a study by the Association for Savings and Investment South Africa (Asisa) revealed on Tuesday.

Leon Campher, the CEO of the Asisa says that while local equity unit trust fund sectors significantly outperformed cash over both the one-year and five-year periods ending 30 June, investors continue to hold the bulk of their money in fixed interest investments.

Releasing the quarterly statistics for the local Collective Investment Schemes (CIS) industry this week, Campher says 48% of the R789bn in assets under management as at the end of the second quarter this year was invested in fixed interest unit trust funds.

Only 23% was invested directly in equity funds, with investors achieving an estimated additional equity exposure of around 13% through asset allocation funds.

Campher acknowledges that the stock market has continued to be volatile, but points out that despite this volatility the JSE All Share Index delivered a 22% return for the year ended 30 June 2010.

"Investors with a solid long-term strategy understand that it is time in the market that ultimately delivers inflation beating returns. Holding your money in fixed interest investments may provide the comfort of stable returns, but these returns will not protect your capital against inflation over the long-term."

Campher says an added concern is that money not committed to long-term investments remains easily accessible and as a result is often used to finance consumption.

"A successful savings strategy requires discipline and a willingness to commit to investments like equity unit trust funds that are likely to
provide real returns over the long term," he says.

Campher points out that the average performance achieved by unit trust funds in the Domestic Equity General sector was 19% for the year ended 30 June 2010, compared to the 8% for Domestic Money Market funds. Inflation (CPI) averaged 4.2%.

"But while local general equity unit trust funds outperformed inflation by 15% over the 12 months ended 30 June, these funds suffered net outflows of R562m for the second quarter of this year. Overall, however, Domestic Equity funds recorded net inflows of R855m over the same period. Domestic Money Market funds, on the other hand, received net inflows of R7.7bn over the same period."

He adds that nine of the top 10 positions in the sector performance rankings for the one year ended 30 June were held by Domestic Equity sectors - returns ranged from 16% to 28%.

The five-year sector performance rankings paint a similar picture. Eight of the top 10 positions were held by Domestic Equity sectors with performances ranging from 12% to 17%.

Domestic Money Market funds delivered a return of 9% against inflation (CPI) of 7%. Campher comments that these returns were achieved despite the financial markets meltdown late in 2008.

Campher says consumers continue to believe that stock market volatility is the biggest enemy of their retirement capital, while it is actually inflation they need to fear.

"As a result we see investors being so defensive in their investment strategies that they sacrifice future inflation beating growth for immediate stability and peace of mind."

Campher says this is particularly true for retired investors.

"If as a pensioner you are supporting your current income by sacrificing the future growth potential on your capital, you are allowing inflation to whittle away the very capital that is meant to sustain your income for years to come."

Campher says real long-term growth can only result from a well-balanced investment portfolio, which includes equities. This, he says, is true for pensioners as well, given that many will spend almost as much time in retirement as they did building their careers.

"Investors who want to achieve inflation beating returns over the long-term must learn to maintain a steady equity exposure as part of a well diversified portfolio. Construct a solid, well diversified portfolio with a trusted financial adviser and then learn to sit out the bad times."

  - I-Net Bridge

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