Structural shifts in the unit trust market

For the first time in well over a decade, the number of actively managed unit trusts in South Africa declined in 2018. However, the overall number of collective investment schemes in the country (unit trusts and exchange-traded funds) still went up. This is because of continued strong growth from passive or rules-based solutions.

As the table below shows, there was a steady increase in the number of both active and passive funds between 2009 and 2017. Last year, however, only passives continued to grow.

Source: The Association for Savings and Investment South Africa (Asisa), Nedgroup Investments 

While one year certainly doesn’t make a trend, it does appear that this may signal a degree of a structural change in the industry. Over the past three years, growth in the number of active funds in South Africa has been slowing, and has now reversed. Over this same time, the number of passive funds has almost doubled.

Taking the period from 2010 to 2018, the growth in the number of passive funds has far outstripped that of active funds. Over these eight years, the number of passive solutions in the local market has more than quadrupled. This is off a low base, but from 4.5% of all funds in 2010, passives now account for 10.8% of funds in the industry.

Source: Asisa, Nedgroup Investments

The Nedgroup Investments Core Chartbook, which analyses the state of the South African rules-based investment industry, also shows that while inflows into almost all fund categories at an overall industry level were lower in 2018 than they were in 2017, passive funds recorded higher inflows in almost all areas.

“It is partly because passive is still growing off a lowish base,” says Jannie Leach, head of Core Investments at Nedgroup Investments. “There is still positive momentum.”

Overall, 23% of the total net inflows into collective investment schemes in 2018 went into passive strategies. This is notable, because passive funds only make up 4.3% of the total assets under management.

Source: Nedgroup Investments

Most notably, while inflows into multi-asset funds at an industry level have declined sharply in this three-year period, inflows into rules-based multi-asset funds have consistently increased. For 2018, inflows into passive multi-asset funds accounted for 39% of all inflows into this category.

For the first time last year, the flows into passive multi-asset funds were also higher than those into any other category of passive solutions.

“The passive industry is following the general South African trend of using multi-asset funds, and it is now gaining market share in that space,” says Leach. “That is where most of the assets in the overall industry are, and where you have seen the fastest growth for passives.”

Source: Nedgroup Investments

Leach also believes that the low return environment has supported this growing interest in rules-based multi-asset products. This is due to advisors looking to extract extra returns for their clients by reducing costs, but also because they don’t want to expose their clients to excessive manager risk.

According to figures from Morningstar, the difference in return between the top-performing and worst-performing multi-asset high equity funds over the past three years is 10.43% per annum. That is a wide dispersion, and illustrates the risk of getting manager selection wrong.

Leach also believes that advisors are realising that there are behavioural benefits to using rules-based solutions with static asset allocations. That is because if the fund performs poorly, investors understand that this is due to the market conditions, not decisions being made by the manager. There is therefore less incentive to switch.

Over time, this might mean that the fund delivers lower returns than the top-performing managers. However, investors are likely to see better outcomes because they wouldn’t have destroyed value by moving in and out of different funds trying to chase performance.

Source: Moneyweb

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