South Africans have been pumping money into fixed-income funds over the past decade, with the category growing from R167 billion in 2012 to R817 billion at the end of September 2023.
This was revealed by the Association for Savings and Investment South Africa (ASISA) in their 2023 third-quarter update.
This is coupled with rapid growth in the multi-asset income category, which has become the largest income category by assets.
South African investors are pumping money into local multi-asset funds, which have attracted R60.5 billion in net inflows over the past year – the second-highest for a 12-month period on record.
The most popular multi-asset categories were multi-asset income funds, with net inflows of R29.7 billion in the 12 months to the end of September 2023, and local multi-asset high equity portfolios, with net inflows of R20.4 billion.
At the end of September 2023, half of the assets under management in local portfolios were invested in local multi-asset funds and 31% in South African interest-bearing funds.
Local equity funds held 18% of assets, and real estate portfolios only 1%.
Senior Fund Analyst at Morningstar Michael Dodd said this is partly due to their predictable returns and, in South Africa’s case, the high yields from money market funds and government bonds.
Partly driven by the consistent launch of new income funds, this category also benefits from the reduced volatility in their returns compared to traditional equity-only funds.
Dodd said multi-asset income funds also allow for less constrained capital allocation, allowing managers to maximise income across a wider opportunity set of assets.
Fund managers overseeing multi-asset income funds can access less traditional fixed-income assets to enhance incremental returns over more conservative income categories.
More specifically, managers can use more aggressive asset allocation, duration and credit management strategies to improve returns.
Multi-asset income funds allow for total equity allocations up to a maximum of 10% and up to 25% for total property exposure.
Higher duration carries higher interest rate risk, potentially exposing investors to increased drawdowns and downside risk.
The graph below shows the average performance of the multi-asset income category versus its more conservative interest-bearing peers.
The latter is a fund category that restricts the investable universe to fixed-income securities and limits duration to a maximum of two years.