Investors are underexposed to equities

2012-02-11 00:00

THE All Share Index broke through 34 000 index points this month, for the first time. Over the past three years, investors have earned a return of 21,2% per annum from the stock market, compared to inflation of only 5,11%. Over the past 10 years, the market has delivered 16,01% pa relative to inflation’s 6,37% pa over the period. The question is, though — are enough South Africans benefiting from these strong markets? Do South Africans have enough exposure to the stock markets?

Data from the Association of Collective Investments would suggest not. It shows that unit-trust investors in South Africa had, in December 1999, 43% of assets invested in local equities. This number fell to a low of 22% at the end of September 2011. The level of exposure increases somewhat when you factor in multi-asset class funds, such as balanced funds, flexible funds and absolute-return funds. While unit trusts and ETFs do account for a substantial portion of retail investments, is it right to suggest that investors are underexposed to the asset class?

A research report from McKinsey & Company released in December and titled The Emerging Equity Gap: Growth and Stability in the New Investor Landscape, examined where private investors invested their financial assets in developed economies, and contrasted them to investors in developing economies. The report showed that investors in so-called emerging economies were significantly underexposed to equities, compared to their counterparts in so-called developed economies. The research found that the financial assets of private investors in emerging economies were concentrated in bank deposits and government securities, unlike those of investors in developed economies. South Africa fared reasonably well compared to other emerging economies, with the research finding that 23% of financial assets of private investors were invested in equities as at December 2010.

The researchers recommended that emerging markets need to do three things to encourage higher equity allocations by private investors. Firstly, policies to strengthen the legal and regulatory foundations of equity markets are needed. Secondly, emerging countries are encouraged to expand channels for households to access equity markets. Finally, enable the growth of institutional investors, such as pension funds and unit trusts, as they provide “patient capital” to markets in addition to liquidity and volume.

From these recommendations, it is understandable that SA fares well, relative to other emerging economies. We have a modern stock market with a strong regulatory framework, sound financial auditing and reporting requirements and a reasonably broad base of investors. The unit-trust industry has experienced growth over 20% pa since 1998, when it had assets of R71 bln, to assets of R975 bln today. Private investors have a plethora of options when it comes to investing with over 960 unit-trust funds, most banks offering some kind of share accounts through Internet banking, the increasing number of ETFs, ETNs and offshore investments. Public Broad-based Black Economic Empowerment (BBBEE) offers would also fall into this category as an investment option. South Africans still have a low exposure to equities, despite all of this.

When one considers that dividend-yielding equity funds delivered more income to investors than cash and bonds since 2000, it becomes clear that equities is not just an asset class for the younger investor. A smart retirement plan would have exposure outside of a compulsory structure (living annuity) in order to benefit from the relatively favourable tax treatment of dividends.

Craig Gradidge is head of investments at Gradidge-Mahura Investments, a new-generation financial-planning business.

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