South Africans can make much more money

South African investors increasingly invest in overly conservative assets, such as income funds, or leave their savings in cash. 

As a result, they are missing out on the significant upside opportunities that investing in equities worldwide gives them for short-term stability and safety. 

This is feedback from Discovery Invest CEO Kenny Rabson, who outlined this common mistake that investors make in the company’s Market Outlook for 2025. 

In Q3 of 2024, the South African unit trust industry saw a pivot inflows of R3.3 billion, marking the first quarter of a positive net flow since December 2022. 

With only one quarter to go, the 2024 year-to-date outflow of R25.3 billion is still greater than 2023’s R21.8 billion. 

Meanwhile, household bank deposits soared and money market fund assets reached all-time highs. 

Since COVID-19, the only sector to capture meaningful inflows was income funds, which attracted R133 billion, while multi-asset funds saw outflows of R74 billion. 

The flows imply that many South African investors have missed the recent global and local equity rally and may not be well positioned to take advantage of future growth. 

They are primarily attributable to an overcautious investment mindset, likely due to the complexity of markets and a climate of growing fear since the COVID-19 pandemic.

Another driver of inflows into these funds is the elevated level of interest rates over the past few years, which has made the yield on fixed-income investments relatively more attractive. 

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

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

As a result, many South African investors have missed out on the massive bull market in global equities over the past few years out of fear of volatility.

“Both the theory and evidence show that remaining committed to an appropriately diversified long-term strategy, which includes a significant exposure to so-called ‘high-risk’ assets such as global equities, holds the best promise of achieving one’s investment goals,” Rabson said.

“The negative, often traumatic, headlines we read in the media might paint a picture of a world in crisis.” 

“The reality is that markets have been relatively stable when viewed over the long term and have offered substantial returns to diversified investors.

“Barring a massive ‘black swan’ type event, the global economy is poised to grow, and both global and local equity markets continue to offer significant opportunity for long-term investors.”

“While we believe that capitalising on these opportunities demands truly global expertise and active management as we transition into a new global economic era, our consistent advice to clients is to spend time in the markets.”

All of this seems rational, but Rabson said that research from Discovery Invest and others 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 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.