January 19, 2004

Last year was an excellent one for the local unit trust industry, with net inflows amounting to a record R38.9 billion, more than double the previous year's net inflows.

After a gentle rise of R5 billion in 2002, the value of the industry's total assets increased by a phenomenal R50.5 billion in 2003 to the present level of R230 billion.

This makes it clear that the local industry is benefiting from an increased focus on unit trusts as investment vehicles of choice.

Not only did the industry manage to absorb its highest annual net inflows in 2003 but it also delivered excellent returns

After a slump in the first quarter, domestic equities made a strong comeback against the backdrop of a powerful global stock market rally last year. General equity funds generated an average return of 21 percent for the year, outperforming the FTSE/JSE All Share index's 16 percent return.

Within the realm of equity funds, small cap and industrial funds generated average annual returns in excess of 33 percent. In the asset allocation sector, flexible property funds returned 33.1 percent on average, to mention but a few of the highlights.

According to the Association of Collective Investments, last quarter's inflows targeted domestic funds exclusively, with foreign funds once again recording a net outflow of R452 million in the last three months of 2003.

Despite the resurgence in equities both locally and abroad, the association's data indicate that domestic flows were largely concentrated in fixed interest funds (R8.2 billion), with money market inflows still absorbing the major share thereof (R5.1 billion). Equity funds attracted net inflows of just below R2 billion, while net inflows to asset allocation funds doubled, rising to R3.3 billion. 

With the component weight of money market assets decreasing by 2 percent, yet still holding 38 percent of total domestic market assets, investors are clearly still erring on the side of caution.

Cash continues to flow into fixed income funds, despite bonds being at historically expensive levels and money market yields being at their lowest level in years.

And despite the firmer rand, the foreign fund component of the unit trust industry continued to decline, with net foreign fund outflows of more than R4 billion for 2002 and 2003 combined.

This implies that investors are compromising potential returns through continued underexposure to equities - a trend that characterised the asset allocation of funds last year and remains a feature of the unit trust industry.

While investors are justified in remaining cautious after the impact of the recent bear market, there is substantial scope for equities as an investment asset class, with overcaution and underexposure to equities potentially translating into a lost opportunity.

On average, money market funds returned 11.8 percent in 2003 versus 21 percent for equity funds - a clear illustration of the point.

With a synchronised global economic recovery on the horizon, reinforced by the continuous flow of positive economic data from the major economies, equities have significant potential to deliver strong growth this year. A more pronounced switch to equities would further enhance the returns of funds in this asset theme.

Despite the challenge of volatile markets and a strong and unstable rand last year, the local unit trust industry has remained resilient and the outlook is very positive.

It is now up to the 26 management companies, which offer 466 funds to investors, to further enhance the industry's reputation, as we focus on the high-quality delivery of our fiduciary prerogative as managers of these assets.

Adam Ebrahim is the chief executive and head of investment at Oasis Group Holdings