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A high savings and investment rate is a key driver of economic growth, something our country desperately needs. In recent years, National Treasury has taken steps to encourage people to save so that ultimately, they are better prepared for retirement and at the same aid the country’s growth.
Last year’s news was dominated by negative political and economic headlines which is disheartening for investors. It is therefore encouraging to know that the fund management industry continued to grow through these trying time. The chart below from the Association for Savings and Investment South Africa (ASISA) depicts the continued growth in assets and portfolios over the last 5 years.
Chart 1: Growth in local Collective Investment Schemes (CIS) Industry
Source: ASISA (30 September 2017)
Multi Asset portfolios are popular locally and have seen the most growth over the last 5 years. However, muted performance in 2016 was subsequently followed by a slowdown in inflows for these portfolios, as investors opted for the lower risk Interest Bearing portfolios which delivered better returns. This kind of investor behaviour is costly for investors and is highlighted in the article Investor Returns and the Cost of Timing the Market.
Chart 2 below illustrates the above point using 2016 returns in select ASISA categories and the subsequent net flows. The Multi Asset categories experienced lower returns in 2016 and subsequently saw net flows slow-down from the previous year. The categories which delivered better returns in 2016 like Interest Bearing and Real Estate experienced increased flows.
Chart 2: ASISA Category 2016 Return and Subsequent Net Flows
Source: Morningstar Direct (31 December 2017)
During the year, 36 foreign CIS (funds) were approved by the Financial Services Board (FSB) for use by local investors. On the local front, 185 new funds including 18 ETFs were approved. Although a greater number of funds to choose from makes it more complicated for investors, the increased competition provides an incentive for asset managers to not only do better but also provide more competitive pricing.
Furthermore, a competitive industry can help to create efficiency and weed out the poor quality funds. Based on Morningstar data shown in the table below, 382 fund classes were terminated during the course of last year, either liquidated or merged with other classes. There is likely a variety of reasons to explain the terminations but it is reasonable to assume that the key reasons are to enhance efficiency through product consolidation and also to get rid of products that have struggled to deliver on their objectives.