SA’s notoriously risk-averse investors appear to have taken a bigger plunge into equity funds than usual as inflation begins to wreak havoc on returns in supposedly safe money-market funds.
According to data from the Association for Savings & Investment SA, R24bn of net flows landed in multi-asset funds in the year to end-March. If you exclude reinvestments (dividends and interest) the amount is closer to R11.6bn with the chunk of it landing in multi-asset high equity funds. The take-up of equity funds was also not too shabby, with net flows of R6.9bn over the same period.
Money market funds, which typically invest in short-dated debt instruments benchmarked to the Johannesburg Interbank Acceptance Rate, started yielding negative returns in mid-2021 as SA’s consumer price inflation began to spike. And the SA Reserve Bank’s relatively muted initial response to rising inflation — it has raised interest rates by only 125 basis points since November — has not been good for cash parked in money market funds.
“Clients sat in cash to the tune of more than R500bn, earning less than 5% returns,” Pieter Hugo, chief client and distribution officer at M&G Investments, tells the FM. “[This] was their safe haven for the previous couple of years.”
But with inflation hovering at above 5% a year since September the Bank is now playing catch-up. “What we’ve started to see in the first quarter of this year is that clients have begun to move out of the fixed-income category (which includes money market funds) into the balanced fund categories,” Hugo says.
Balanced funds typically invest in a mix of assets, which include equities, property and bonds, but are less risky than pure equity funds. During 2021 some balanced funds’ average returns clocked in at 20%, Hugo says.
Tamryn Lamb, head of retail distribution at Allan Gray, which houses SA’s largest balanced fund, with R159.5bn under management, says the word from financial advisers is that the flows into balanced funds aren’t “new money”.
“Advisers tell us this is money that was parked in money market accounts or other low-risk products at a very uncertain time,” she tells the FM. “And now they want to pull it back into higher-risk products.”
A renewed interest in SA equities makes sense. The JSE top 40 index is down only 2.5% this year, whereas the SA-facing midcap index is almost unchanged over the same period. This compares well with SA’s emerging market peers; the MSCI emerging market index is down 13.1% in dollar terms since the beginning of the year. Allan Gray’s Balanced Fund had allocated 52.1% to SA equities by the end of April, while half of the Coronation Balanced Fund was invested in the same asset class.
Coronation still holds the view that domestic equities are undemandingly valued across SA Inc
— Pieter Koekemoer
“Coronation still holds the view that domestic equities are undemandingly valued across SA Inc, commodities and the global businesses that happen to be listed here, with low earnings multiples and high dividend yields,” says Pieter Koekemoer, head of personal investments at Coronation Fund Managers. “The presence of value in the domestic equity market is evidenced by more than 50 buy-outs announced or concluded over the past two years.”
Lamb shares the same view of SA equities at current valuations, though she cautions that over the past five to seven years this asset class has underperformed its global peers. “But the valuations are compelling relative to offshore. We still believe there is upside.”
This is especially the case for some globally diversified stocks listed locally, she says.
But not everyone says local equity valuations are cheap, given SA’s lacklustre economic growth performance and the outlook for it.
“Valuations are optically cheap,” Sumesh Chetty, portfolio manager at Ninety One, tells the FM. Among the five largest balanced funds in the country, Ninety One has the smallest allocation to local equities.
“It is true that investors have made a lot of money in the past when they invested at current p:e levels,” he says. “However, SA was generating much higher levels of growth at those points.
“If the country can return to real growth of, say, 3%, SA Inc could be considered cheap. But unemployment, a weak consumer, a lack of investment and intermittent electricity [will] throttle growth in this country.
“Opportunities do exist in the market, but investors need to be very selective rather than investing broadly,” he says.
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