Macro Perspective 37 | South Africa's changing investment landscape

In this podcast, Peter Brooke discusses the quarterly unit trust statistics for Q2 2023 in South Africa and reflects on the changes in the country's savings industry over the years. Looking back 20 years ago, he notes that the industry has grown significantly, with total assets now reaching R3.4 trillion, primarily driven by compounding returns. Despite the industry's growth, the number of unit trust accounts has only increased from two million to three million over two decades, suggesting limited broadening of financial access in a population of nearly 60 million people.

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Chapters

• 0:00 Using quarterly Unit Trust statistics as an indicator of how SA’s savings industry is developing
• 0:55 The changes between now and 20 years ago
• 1:59 The big change of the makeup of where people save
• 2:32 How asset allocation funds have become a big winner

Transcript

Peter Brooke  00:00

Hi there, I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 37 of 2023, and the quarterly Unit Trust statistics for Q2 came out recently. These are always a fascinating indicator of how South Africa's savings industry is developing, and where retail flows are going. Net inflows for the quarter with 16 billion rand, and the big winner has been multi-asset class funds. Although, within this there's been a variable income category, which is gaining 46 - sorry, gaining nearly 40 billion over the 12 months. This makes perfect sense to us, as higher interest rates should attract money from bank deposits. And as we near the peak in local interest rates, investors need to lock in longer duration, which funds like the Real Income Fund allow them to do. 

Peter Brooke  00:55

However, for me, looking at the CSIS stats is a trip down memory lane. 20 years ago, when I was a stockbroker, I used to produce a quarterly research report looking at the investment implications of the asset flows. So, for fun, I reopened my old spreadsheets and looked at the change. Firstly, the unit trust industry is vastly bigger. Back in June 2006, total assets were just under 500 billion rand. Today there are 3.4 trillion rand. However, this largely represents 17 years of compounding returns. Back then, quarterly inflows averaged 15 billion rand, pretty much in line with the current level. And that current growth of 15 billion is all about reinvested dividends and interest rather than fresh net savings. Back then, there were roughly 2 million unit trust accounts. Well, today there are 3 million, so not really showing much broadening of financial access on a population of nearly 60 million people. 

Peter Brooke  01:59

The other big change is the makeup of where people save. The mega trend of savers and advisers switching out of domestic equity funds and inter asset allocation funds has continued. Back in the late 90s, domestic equity funds were more than 50% of industry assets. When I was looking at them in detail, they had fallen to the mid 20% of total assets. And that was in the 2000s. And today, we're at 15% of total assets when we include money market funds. 

Peter Brooke  02:32

The other side, the big winner has been asset allocation funds, growing from 5% of assets in the 1990s to more than 40% currently. And within these asset allocation funds; the foreign component has grown steadily as regulation has been relaxed. And this might explain why offshore funds bought in South Africa have not really grown that much because the underlying solutions have taken the money out. But if we put these together - the shrinking in equity, the growth in offshore, or growth in solutions - what we see is one of an interesting side effect, which has been the obliteration of small cap unit trusts. Back in their prime, small cap funds peaked at 10 billion rand of assets in Q2 1998. That was nearly 13% of industry assets, and it caused a hot sector. By Q2 2006, it had fallen to 5 billion rand or 1% of industry assets. 17 years later, those small cap funds are still 5 billion rand, but are now 0.15% of industry assets. No one cares about them. And they are just too small for most investors to focus on. And I think this is the classic definition of capitulation and contempt. So, I'm sure that this will provide rich pickings for a handful of old timers. I hope you enjoyed this perspective. Until next week.