Though unit trust flow figures for the first quarter of 2002 show mostly positive returns for the past year, retail investors remain wary about investing in unit trusts after years of returns going nowhere.

Peter Linley...retail investors still have a poor appetite for risk

Recently released Association of Unit Trust (AUT) figures show that the unit trust industry attracted inflows of R2,5bn during the first three months of the year. The bulk of the funds went into money market funds. Investors shied away from general equity funds and, apart from a few select categories, there were significant outflows from the rest. But the overall figures don't give a good indication of individual investor patterns because the institutions have become such important investors into the industry.

Multimanagers and institutions who invest in unit trusts dominate the action in the industry. The AUT calculates that 55% of net inflows during the three months to end-March were institutional investments and the rest was retail money.

To get a better idea of what actually happened with the retail investor, Old Mutual splits the total flows into institutional and retail investments - something the AUT is planning to do soon - and this gives a different picture of investment behaviour during the quarter. Old Mutual (OM) calculates that individuals invested R1,2bn during the first quarter compared with institutions' net R1,3bn investment. OM Asset Managers executive director Peter Linley says the figures strip out the administrative moving of money or institutions using the unit trust label to shift from one product to another.

The figures show that retail investors still have a poor appetite for risk, with by far the most money going into money market and specialist high-income funds, and only select and limited investment into a couple of the specialist fund categories in the general equity arena.

The money market funds category attracted R1,7bn from retail investors, which means there was an overall net outflow of R563m from the other unit trust funds.

Coronation head of retail business development Pieter Koekemoer says, when total money market fund flows (both institutional and retail money) are excluded from total industry flows, it becomes the first negative quarter the industry has experienced for a long time. Total net inflows (including institutions) were R2,5bn, net inflows to money market funds were R2,6bn with a resultant R173m leaving the rest of the unit trust industry, even with the institutions' participation.

He says specific parts of the industry have been under pressure. "But there's always been some event that has assured there would be positive flows. A reason for the poor performance could be that there is investor negativity regarding the equity market even though domestic equity had a strong run from late last year. The JSE is continuously testing record levels and local shares have been a good rand hedge. Sentiment is slow to catch up."

Linley says since 1998 there have been outflows from general equity because the events at that time really shook investors. Local markets did not perform well until last year. But he points out that equities have outperformed bonds and cash over the past three years because of the strong fourth quarter returns last year.

General equity funds

The figures speak for themselves. Eight out of the10 domestic equity category funds lost money during the first quarter and there was a total net outflow of R565m from retail investors, according the Old Mutual adjusted numbers. The only two sectors that did attract money are the subject of an intense debate in the equity market. Investors are frantically deliberating on whether the resource sector has become overvalued and whether financials are about to take their place at the top of the stock market league.

Mining and resource funds

During the first quarter, mining and resource funds attracted an additional R100m flows after their dizzying performance during the past year. Mining and resource funds dominate the Standard & Poor's top 25 unit trust performers for one year to the end of March, with returns ranging from Standard Bank Mining and Resource's 63,3% to Futuregrowth Core Mining and Resource's 93%.

FTNIB head of wholesale asset managers managers Steve Arthur says resources dominated the sector despite the stronger rand. He says international analysts upgrading their forecasts and a significantly stronger international outlook countered the negative influence of a stronger rand on resource stocks.

Liberty Asset Management head of unit trusts Ian Woodley doesn't expect the same performance from the Resources index this year. He says the counters were oversold and got a "double kicker" from the rand that won't be repeated: "It may be too early to get out of resources but don't put all your money in and expect 100% growth". Linley says Old Mutual has been experiencing net new flows into the mining sector and "there may still be money to be made in resources". He also warns it is a difficult call because resource shares are expensive and suggests that financials "may be a less risky entree to the market".

Investors could go into resources with 10% of their portfolio, says Investec Asset Management head of unit trusts Jeremy Gardiner. But he emphasises that the sector should not be a core investment.

Gold funds

Gold dominated the financial markets during the first quarter and there was substantial demand for gold unit trusts, driven by the rally in the gold price to above US300 recently and the reduced hedging that gold mining companies were undertaking. The AUT figures do not split out the gold unit trusts so it is not possible to see the flows. But they were the top performers during the first quarter. S&P calculates that the Standard Bank Gold fund delivered the best 159,22% return over a year and was followed closely by the Old Mutual Gold fund - up 149,4% on the previous year.

Linley says Old Mutual experienced big inflows into its gold unit trust, Old Mutual Gold. "We have seen a lot of bullish technical factors. In an uncertain global environment, it is not a bad diversifier. By all means speculate but be careful of the amount of money you put into the sector."

Woodley says most of the effect of the rand has been priced into the gold shares. "There will be some upside earnings surprises," he predicts, "but to a large extent they have been factored in."

Financial funds

Despite the good resource performance, individuals were even bigger buyers of financial unit trusts during the quarter, investing a net R134m perhaps in anticipation of the action shifting away from expensive resource counters to the cheap banking stocks.

Past performance could not have played a role in decisions to invest in the financial sector because the financial funds featured heavily in the S&P list of the worst 25 unit trust performers during the year to end-March. Standard Bank Financial Services came last with -21,99% returns and the performance of Liberty Financials (-18,09) and Sage Financial Services (-18,99) was not much better.

But individual investors, usually notorious for investing in a sector as it is about to decline from its peak, may not be switching into financial funds because they've learnt the importance of foresight.

Koekemoer says Coronation fund managers have experienced interest in financial funds and have seen "quite strong flows". But he says these have been from multimanager-type investors that are upping their financial and reducing their resource exposure.

BoE fund manager Arthur Karas says bank stocks have only been this cheap three times in the past 29 years. "It's just a question of when resources are going to run out of steam."

"Banks are looking like value shares," says Woodley. "The story isn't compelling but the value is. They a re looking cheap."

Fixed interest funds

The bond and income funds were victims of higher inflation and interest rates. The biggest sell-off by retail investors of any fund occurred in the bond funds, with net outflows of R471m. Income funds experienced R15m withdrawals.

Koekemoer says Coronation is experiencing subdued flows into domestic fixed interest products. Inflation gave investors a scare, he says, but adds that with property yields at 15% plus, it may be a good time to get into the property sector. In a rising interest rate cycle he says cash plus types of funds are interesting because they have shorter durations and not as exposed to capital losses if interest rates do rise "and you get a yield enhancement".

Foreign equity funds

The foreign equity funds had the second-largest sell-off between January and March with net outflows of R39m. The AUT says global markets lost money in rand terms over the quarter: the Morgan Stanley Capital International World index lost 4,9% during the first quarter and the JP Morgan International Bond Index declined 6,7%. But over a year they delivered 36,4% and 42,6% in rand terms respectively.

The institutional figures paint a different picture of investment behaviour. Money market funds were still the biggest recipient of inflows, attracting R941m, but bond funds gained (R441m), and domestic general equity funds (R266m). Both had significant outflows in the retail sector.

Institutions were the biggest sellers of smaller company domestic equity funds, offloading a net R301m.