Investing, at least in the context of financial planning, is a long-term endeavour in which your money buys productive assets that deliver returns in the form of income and capital growth. The compounding of these returns, including reinvested income, grows your investment faster than inflation can erode it. Building wealth takes time.
Investment experts tirelessly caution against trying to time the markets by switching out of underperforming funds into funds you expect will provide better returns. However, recent statistics from the Association for Savings and Investment SA (Asisa) and Momentum show that a great deal of switching occurs, and that it’s largely detrimental to wealth creation.
CIS inflows and outflows
At a recent presentation by Asisa of collective investment scheme (CIS) results to the end of 2024, Sunette Mulder, Asisa’s senior policy advisor, said the local CIS industry ended 2024 with assets under management of R3.87 trillion. Assets had grown by 10.8% in 2024, largely driven by healthy stock market performance: the FTSE/JSE All Share Index delivered a return of 13.4% over the 12 months.
However, although the markets did well, investor behaviour had a negative effect on assets under management. In fact, CIS management companies recorded net outflows of R35.25 billion in 2024. This means the 10.8% growth came only from reinvested returns.
Mulder noted that SA Equity General portfolios suffered the bulk of the outflows, with investors pulling out R11.95 billion. On the other hand, there were inflows of R42.31 billion into SA Interest Bearing and SA Money Market portfolios.
Why did investors pull out of SA equity funds? They believed their money would either do better somewhere else (in offshore equity funds, for example) or would be safer somewhere else (in interest-bearing investments). They lost faith in the JSE which, it turns out, did pretty well.
Switching analysed
Momentum’s Sci-Fi (Science-Finance) Report for the 12-month period September 2023 to August 2024 analysed investor behaviour in a pre-retirement discretionary product and a post-retirement living annuity product, each of which offer a wide choice of underlying funds. It measured the loss or gain an investor made by switching funds versus staying put. Invariably, switching resulted in a loss, which the report calls “behaviour tax”.
During the 12 months, there were 2.32 switches per investor, on average, in the discretionary product and 2.16 switches per investor in the living annuity. This resulted in a “behaviour tax” of 3.53% of rand value switched in the discretionary product and 4.26% in the living annuity product. In other words, if they had not switched, the average investor would have improved his or her annualised return by 3.53 percentage points or 4.26 percentage points respectively. That’s a big chunk of annual return.
Evidence points to investors switching because of past performance. In 2023, the JSE performed poorly while the MSCI World Index performed extremely well. In 2024, the reverse happened: the JSE performed well and the global index delivered mediocre returns.
Quoting the report: “In the 2024 period, the Momentum Core Equity Fund experienced over R31 million in outflows. The fund’s 2023 performance was 8.44%. The returns in the subsequent year (2024), however, were over 17% and so the investors missed that 8.5% uptick. Over R60 million flowed into the Satrix MSCI World Index Fund, likely from a great 2023 performance of over 27%. The following year’s performance, however, was much lower, at just over 16%. It is a clear pattern that funds switched out of based on lower prior year performance invariably perform better in the subsequent year and those switched into based on high prior year performance invariably yield lower returns in the subsequent year.”
