- The local fund industry has continued to grow both in assets and in the number of options available to investors.
- The South African fund landscape remains dominated by multi-asset Allocation funds.
- Fixed Income funds increased their market share from 17% in 2012 to 24% at the end of 2022.
- Global Equities have been the last decade’s biggest winner – both in allocation and performance.
- There has generally been a shift out of lower risk Money Market funds into slightly higher risk, Fixed Income fund options.
- The ASISA Global Equity General fund offering exploded from offering only 30 funds at the end of 2012 to around 130 funds at the end of 2022.
- The once-popular category of South African Real Estate funds has seen a notable decline.
At the end of 2012, there were roughly 900 different South African-domiciled funds available for investment. Since then, this number has almost doubled to a count of around 1,750 funds. At the end of 2022, assets under management in South African-domiciled open-end funds sat at just over R3 trillion. In isolation, this is already a staggering number but when we widen the timeframe to just 10 years ago, it has since increased roughly threefold. Set against the backdrop of a decade of unexciting and pedestrian domestic asset class returns, the local fund industry has continued to grow both in assets and the sheer number of options that are out there for investors. This article aims to pick through some of the noteworthy trends observed in South African fund flow data over the last ten years.
The dominance of Allocation funds and the rise of Fixed Income funds
The chart shown in Exhibit 1 illustrates the overall growth of total net assets held in South African-domiciled funds over the last decade, broken down into Morningstar’s Global Broad Category Groups.
These are defined as follows:
- Allocation: Consists of multi-asset class portfolios that seek to provide both capital appreciation and income by investing in three major areas: stocks, bonds and cash. In the South African fund context, this category is made up of local and global multi-asset class funds such as balanced funds and flexible funds.
- Equity: Consists of funds that invest primarily in stocks. In the South African fund context, this includes both local and global equity portfolios, as well as real estate portfolios.
- Fixed Income: Consists of funds that invest in fixed income securities, including bonds and/or money market securities. In the South African fund context, this includes both the local and global interest-bearing funds of both short and variable terms, as well as multiasset income funds.
- Money Market: Consists of funds that invest in shorter-dated money market securities.
- Miscellaneous: This covers any portfolios that do not fit into any of the above categories.
Viewing this chart in conjunction with Exhibit 2 below, which shows the changing market share of these particular categories over the last decade, highlights a few notable observations in the data.
A few key observations:
- Firstly, the South African fund landscape remains dominated by multi-asset Allocation funds. At the end of 2022, Allocation funds accounted for 40% of total net assets in South African-domiciled funds. South Africa is somewhat unique in this instance. In the United States and the United Kingdom, for example, Allocation funds have market shares of only 5.8% and 14.2% respectively in those particular fund markets, where the Equity category is far more prominent.
The dominance of the Allocation category in a South African context is very likely tied to the regulatory framework governing retirement savings in the country. In particular, Regulation 28 of the Pensions Fund Act sets asset class limits around how investment vehicles used for investors’ retirement purposes can allocate their money. Most funds that fall into the Association for Saving & Investment South Africa (ASISA) South African – Multi-Asset – High Equity category, (the ASISA fund category with the highest total net assets) will be Regulation 28 compliant balanced funds.
- Another notable observation is the increased market share of Fixed Income funds over the last decade. The Fixed Income category had a market share of 24% at the end of 2022, a notable increase from its market share of 17% ten years prior. This market share has been taken to a lesser extent from the Equity category, whose market share declined from 26% to 23% over the same ten-year period, and to a much greater extent from the Money Market category whose market share declined from 20% to 12% over this period. The reason for this growth in the Fixed Income category is likely due to the period of relatively low interest rates and rising bond yields over the last ten years, which has seen investors move their income assets up the yield curve in search of better real returns.
The increased demand for Fixed Income funds can be seen in Exhibit 3 below, which shows the estimated net flows into the various Morningstar Global Broad Category Groups per calendar year for the last ten years. Fixed Income was the only category that saw net inflows in every calendar year of the past decade and was the most in-demand category through the 2017-2021 period.
- The Allocation category, which continued to attract net inflows in the early part of the last decade, saw inflows dry up in the latter part of the last ten years. With relatively lower interest rates and, therefore, lower cash yields on offer, Money Market funds have similarly been out of favour from a flow perspective. The major exception to this was the calendar year of 2020, as the heightened market volatility related to the Covid-19 pandemic of that year saw investors seeking refuge in cash.
- Within the Equity category, the generally positive net flow data of the category hides an interesting underlying trend in some of the Equity sub-categories. Specifically, when looking at the ASISA fund category flows within the Equity category, the size of estimated net flows into Global Equity funds have been more than double that of South African Equity funds. Additionally, a limitation of this analysis is that it only captures the fund flows into South African-domiciled funds and does not capture that many South African investors may have externalised some of their assets and invested in funds domiciled offshore. So, this underlying trend of money being moved into offshore assets could be even greater than what looking at it through the lens of fund flows suggests.
Global Equities have been the last decade’s big winner
If we look beyond the Morningstar categorisation of funds and look specifically at the ASISA fund categories that many South African fund investors will be familiar with, it paints a more detailed picture of some of the trends we have already observed.
The two tables below capture the market shares of the top 10 ASISA fund categories by total net assets as at the end of 2012, and 10 years later (as at the end of 2022).
Some interesting themes come through in looking at the changes in market shares of these categories over the last ten years:
- Firstly, the shift into income funds that was also observed in the Morningstar categorisation is visible on a more granular level here. There has generally been a shift out of lower risk Money Market funds into slightly higher risk, fixed income fund options that can be found in the Multi-Asset Income, Interest-Bearing Short-Term and InterestBearing Variable Term categories.
These funds can generally invest across a much broader spectrum of fixed income assets, including nominal and inflation-linked bonds, credit, money market securities, and in some instances, real estate and equity instruments. With interest rates having been at relatively low levels in the last decade than in prior years, investors have moved up the yield curve in search of higher returns in the last ten years.
The increased market share and demand for income funds have also naturally seen some substantial growth in the number of funds available for investment in the three ASISA categories mentioned above. Over the last ten years, the number of different funds in these categories has doubled, from roughly 130 funds (at the end of 2012) to roughly 260 funds(at the end of 2022). Linked to the above trend of the rising demand for income funds, funds in the conservative Multi-Asset Low Equity category have also seen a drop in popularity and market share over the last decade.
- Secondly, the rise of Global Equity funds at the expense of South African Equity funds is also visible. Several factors may have driven this, not least the considerable outperformance of the global equity market in Rand terms over every South African asset class over the last decade.
Another considerable factor that may have driven the growth in the Global Equity category over the last ten years has been regulatory changes. At the end of 2012, Regulation 28 permitted a maximum offshore exposure of 25% with an additional 5% offshore allowance for investment in Africa. Fast forward ten years and the maximum offshore limit permitted by Regulation 28 now sits at 45%, and the number of different funds available for investment in the ASISA Global Equity General category has exploded from around 30 funds at the end of 2012 to around 130 funds at the end of 2022.
- Lastly, the once-popular category of South African Real Estate funds has seen a notable decline after a particularly tough decade for the asset class. This fund category’s market share peaked at the end of 2012 at 3.44%, but in the wake of the sector’s poor performance over the last decade, it has shrunk not just in market indices, but also in popularity among investors. The market share of the South African Real Estate category has more than halved over the last decade and sat at 1.28% at the end of 2022.
From a performance perspective, much has already been written about what a lean decade it has been for South African investors. Exhibit 6 shows the contrasting fortunes of the average returns for the current eight largest ASISA fund categories over the last ten years.
The Global Equity General category has been head-and-shoulders above the other seven categories, outperforming the next best-performing category (SA Multi-Asset High Equity) by almost 6% per annum over the full ten-year period.
The challenge that South African investors have faced over the last decade is clear to see from the performance of the different fund categories over this period.
There has been a very narrow range of single-digit return outcomes for investors in South African funds over the last decade, ranging from the annualised 6.1% delivered by the average Money Market fund to the annualised 7.5% delivered by the average Multi-Asset High Equity fund. With South Africa’s annual inflation rate of 5.2% over the last ten years, it means that your average balanced fund has delivered a fairly unexciting return outcome of roughly CPI+2% over this period. This is well below the types of return targets that these funds aim to deliver.
What have we seen in 2023 so far?
At the end of May 2023, we have generally seen a continuation of the prior decade’s trends. Of the largest ASISA categories by total net assets the top-performing ASISA sector year-to-date, by some distance, has been the Global Equity General category, with the average return for this sector being 24% in Rand terms as stronger global equity markets and a weaker Rand have propelled returns from funds in this category.
In contrast, the average South African Multi-Asset High Equity fund has delivered 6% year-todate and the average South African Multi-Asset Income fund has delivered 2%.
Nonetheless, asset flow data for 2023 thus far suggests that the demand for income funds remains strong. Year-to-date an estimated R40 billion of net inflows have gone into South African-domiciled Fixed Income and Money Market funds. Given the recent rounds of interest rate hikes and rising bond yields this year, the prospective returns for these kinds of funds are looking more attractive than they were at the start of the year. In stark contrast, Equity funds have seen estimated net outflows of R14 billion so far this year.
It can be tempting, at the end of reading all of this, to want to extrapolate recent trends into the future and assume that the coming decade will look much like the last. This would be a prime example of recency bias – a cognitive bias that favours recent events over historic ones. The reality is that investment markets and economies tend to move in cycles, and what worked in one cycle may not necessarily work in the next. As the standard disclaimer on many fund fact sheets go: past performance is not indicative of future results.
Additionally, while looking at the trends in fund flows does provide some interesting insights, it is also far from being the full picture of the South African savings landscape. There are many areas of South Africans’ savings that fall outside of the construct of these investment vehicles, such as savings that sit in bank accounts and banking products, money invested in direct stocks through brokerage accounts and, as was previously mentioned, money that has been externalised for direct offshore investment, to name but a few.
One thing that has changed materially for South African fund investors, however, is the sheer amount of choice that is now out there. At the end of 2012, there was a total of roughly 900 different South African-domiciled funds available for investment. In the last ten years, this number has almost doubled, to a count of around 1,750 funds. It leaves the fund investor faced with a bewildering number of options, which is why manager research and fund selection is such a crucial part of Morningstar’s investment process.