South African investors shoot themselves in the foot

South African investors have shot themselves in the foot over the past few years by investing heavily in income funds rather than balanced funds, equity funds, or multi-asset funds. 

This has resulted in them missing out on the massive bull market in global equities over the past few years out of fear of volatility. 

Data from the Association for Savings and Investment South Africa (ASISA) shows that 31% of all assets under management were invested in local interest-bearing portfolios. 

In contrast, only 18% of assets were held in South African equity portfolios, according to ASISA’s latest quarterly review of the asset management industry. 

This is despite the positivity surrounding local equities following the formation of the Government of National Unity in June 2024. 

Discovery Invest CEO Kenny Rabson recently outlined some of the reasons why South African investors have been putting more of their savings into income funds and how this has negatively impacted them. 

In a piece sent to Daily Investor, Rabson said the data clearly shows that diversifying your investments across a range of assets and geographies can enhance returns while mitigating risk. 

However, research also shows that investors are not completely rational and do not always have perfect information. 

As a result, heightened volatility in financial markets over the past few years and a fear of underperformance have led to a more conservative investment approach among South African investors. 

Rabson explained that this highlights how loss aversion tends to drive investment decisions rather than potential returns. 

The fear of losing money has been coupled with interest rates being raised to combat inflation, increasing the potential returns from fixed-income funds. 

These factors have combined to draw local investors into these funds, with South Africans preferring to put their money into income funds rather than equity funds since 2017. 

While investing in fixed-income assets may seem like a safe, attractive option, it also comes with a significant risk of missing out on the superior returns equities can provide investors over time. 

Rabson said the shift towards income funds has resulted in many individuals missing out on the gains of recent strong runs in global and local equities. 

In particular, the focus on local income funds has resulted in investors missing out on the massive bull market in US equities. 

Rabson explained that this cautious approach, while understandable in uncertain times, may limit investors’ ability to fully capture the benefits of a portfolio exposed to local and global equities. 

He also outlined why it might be a mistake for investors to only expose themselves to South African equities. 

This not only increases your risk, as you are significantly exposed to a single economy, but it also ensures you miss out on a wider opportunity set outside of South Africa. 

Rabson explained that high-growth sectors, like healthcare and technology, are largely inaccessible in local markets and only become available through international diversification. 

This ensures investors are exposed to higher growth opportunities that do not exist domestically. 

However, this does not mean that there is no place for fixed income or even cash in investment portfolios. 

Crucially, fixed-income funds provide predictable returns, which are far easier for many investors to handle than the volatility seen in equities. 

Local fixed-income instruments also provide relatively high yields, which makes them attractive in their own right. 

However, the increased volatility seen in equities tends to only occur in the short term, and over the long term, they stand to offer investors much better returns.