Unit-trust investors smiling again as funds find their feet
Quarterly results released this week should see most stock market punters breathing a sigh of relief, but the space for growth is limited, writes LUCIENNE FILD
The local stock market staged a remarkable recovery in the three months ending in March this year, overcoming the market turmoil of last October and the instability of early January.
While the industry has placed its bets on equities for the rest of the year, especially in the present falling interest rate environment, words of caution are also being sounded.
Equity funds have already chalked up most of the performance they can expect, with the JSE all-share index up 42% from its January low.
In its quarterly Investment Update, RMB Unit Trusts says another 10% to 15% growth in the stock market is possible, but an additional 42% is extremely unlikely.
RMB advises new investors to expect a phase of consolidation from the current high. This does not mean, however, that the equity market should be avoided, but rather that investments in equities should be phased in over time.
Investors should therefore invest monthly amounts rather than lump sums.
The Association of Unit Trusts (AUT) reports that while the quarter's net inflows into equity funds increased by 54% year on year, they dropped from the previous quarter because of higher numbers of investors selling their units.
General equity funds suffered the most. The AUT ascribes this partly to profit-taking, and partly to investors switching to other funds, especially the high-risk, high-performance specialist funds.
Inflows into the specialist fund sector during the quarter jumped by 80%. It was mainly the financial services funds which benefited from the inflows following spectacular performances on the JSE.
The average return for the past year in the general equity sector was 24%, against an inflation rate of 4.9% and a rise in the all-share index of 9.5%.
Average returns for three and five years were 19.1% and 20.6%, compared with inflation of 7.1% and 8% respectively.
But before you invest your money in the biggest fund sector, namely general equity, decide how much risk you are prepared to take.
In other words, are you a conservative investor comfortable with low-risk and average returns, or do you expect high returns and are happy to take above-average risk?
The adjacent scatter-plot graph shows the risk-versus-return ratio of the 26 funds in the general equity sector that have been in existence for three years or longer. (Funds younger than three years are not depicted because their ratios would be misleading.)
The data, based on the March 31 quarterly figures, has been supplied by independent statistical source Standard & Poor's Micropal.
Scatter-plot graphs, showing the returns achieved by a fund relative to the risks taken by the fund manager, are internationally accepted as a simple guide for individual investors.
The risk referred to in this instance is the volatility of a fund's returns during the three-year period under review.
Volatility is a measure of risk - the higher the figure, the higher the volatility of a fund.
A high-risk fund is not necessarily a bad one, provided it gives you the corresponding high returns.
The dotted lines in the graph show the average risk and return of the 26 funds, dividing the chart into four quadrants.
Ideally, a fund should be situated in the top left quadrant. Funds in this quadrant provide their unitholders with an above-average return at a below-average risk.
Funds in the bottom left quadrant are performing below average, but can be considered low-risk funds.
Conservative investors may feel more comfortable in funds situated on the left-hand side of the vertical average risk line.
Whether a fund is positioned above or below the horizontal return line determines whether it renders above- or below-average returns.
The bottom right quadrant houses those funds which perform below average at a higher-than-average risk.
If you are invested in a fund which finds itself in this quadrant for three or four quarters in a row, you might want to consider switching to a more efficient fund. But bear in mind that there are costs to pay in switching funds.
The funds in the top right quadrant are producing above-average returns, although at a higher-than-average risk.
Funds in this quadrant are for the more daredevil investors, who are keen to invest at a high risk to get their above-average returns.
The table lists the 10 top performing funds and those 10 funds which came last out of a total of 81 funds (which are older than three years) for the three-year period to March 31. BT Money produces the scatter-plot graph at the end of every quarter.