Unit trusts aren't what they used to be: a mom-and-pop savings vehicle, an easy way to get your cash onto the JSE, safe in the knowledge that an "expert" would guide you around the lemons to the winners.
That has changed dramatically over the past five years. In March 1998, general equity funds accounted for 46% of industry assets and fledgling money market funds barely 10%. Now, general equity funds account for just 13% of industry assets and money market funds 34%.
This means that even in a year in which the JSE has fallen 27%, industry assets have remained stable. At R174bn the total industry is now just 1% below the level of March 2002.
Money market funds and international funds - the unit trusts management companies were entitled to hold up to 20% of their assets internationally - were the main drivers of industry growth over the past five years.
However, regulatory changes closed new offshore capacity from the beginning of 2001 until May 1. That left many unit trust companies without the fastest growth area of their portfolios. Profitability fell . But that is set to change at last.
As stated in this year's budget speech, new capacity is to become available. Unit trust management companies will be able to build their offshore assets up to 20% of their total assets. But with international equity markets suffering even more of a funk than the domestic one, there is unlikely to be much demand. On top of that, recent rand strength has dulled local investors' appetite for offshore exposure. Foreign general equity funds have lost investors 42,2% of their assets over the past year.
Despite the duo of rand strength and foreign weakness eroding offshore investments, other factors helped the fortunes of the industry overall.
At the end of 2001, the introduction of capital gains tax (CGT) proved to be a boost for the unit trust industry. Unit trusts operate on the conduit principle: capital gains within the fund are not taxable, as tax is paid when investors sell their units. This made it beneficial for the old wrap funds (portfolios of unit trusts) to convert to funds of funds, which are part of the unit trust industry.
It also became convenient for institutions to set up specialist building blocks for their own exclusive use, such as the Sanlam Institutional Special Opportunity fund or the Prudential Core Value fund, which are used for institutional clients and are not directly available to the public.
These institutional funds contain assets of R37,4bn, accounting for 22% of the industry.
The introduction of CGT on October 1 2001 was the last significant boost to unit trust industry assets, which increased from R140bn to R175bn between September and December 2001, helped by the strong market during that quarter.
But current and future profitability of the management companies is under threat.
Institutional and money market funds have low margins and though international funds attract high fees, much of this is paid away in the much higher fees charged to manage international assets, usually subcontracted to an offshore management company.
The unit trust industry needs to attract money back into its more profitable local equity products, but now has to compete with low-fee index-tracking funds and new products like Satrix, which gives investors a ready-made basket of the JSE top 40 shares.
Association of Unit Trusts chairman Bernard Nackan says it should be an attractive time to buy local equity funds as the JSE is trading on historically low multiples.
"Unfortunately, it takes time to rebuild confidence in equity investment. In the 10 years after the 1969 market crash, unit trust sales were negligible."
AUT executive vice-chairman Di Turpin says the next opportunity for growth could be a return to the mass savings market, which was once the industry's bread and butter.
Old Mutual Unit Trusts MD John Bryant says the unit trust industry ceased to be attractive to the mass market in the mid-1990s, when it refocused its marketing on specialist products for the linked product and wrap fund industries. Less sophisticated investors were uncertain which of the 350 retail funds to choose from.
The first concerted attempt to win back significant debit-order business was the Big Easy range introduced by Sanlam three years ago, with the tag line "the only unit trust investment you ever have to make".
The funds were grouped according to risk profile, from conservative to aggressive.
Late last year Old Mutual introduced the Four Plus funds, which take investments as low as R150/month, compared with a minimum of R500/month for the rest of the range. There are four funds varying from an enhanced cash fund, Four Plus Secure, to Four Plus Global, a diversified mix of local and international assets, including equities, cash and bonds.
The snag is that the value for money is poor. Investors paying less than R250/month have to pay an additional levy of 3% on top of their 5% initial fee. But Bryant says it is the only way he can make money for his shareholders.
Solution-based funds have been a buzzword, not only at the bottom end of the market but in most unit trust product launches over the past year. Many of the new products have been called "Inflation Beater" or "Inflation Linked" or have had some variation on "Absolute Return", many of them making use of the issues of inflation-linked bonds over the past two years.
There were no new global equity funds over the past year, but a number of conservative funds based on fixed interest, such as the Standard Bank Euro Currency Fund of Funds and the RMB International Income funds, were launched.
Some specialist funds were closed, with three of the four consumer funds converting to industrial funds, with broader mandates.
And the next 12 months, for the first time in the history of the industry, should bring a reduction in the number of funds. Under the new Collective Investment Schemes Control Act, it will be possible to close marginal funds.
Many management companies will use this opportunity to close funds with less than R50m under management, which is considered the break-even level for a fund.
Most faddish funds, such as technology funds and those with names like Intellectual Capital, which already look so "last century", should close.
And up to 50 funds could disappear as a result of the recent megamergers - the merger of Standard Bank Unit Trusts and Liberty Collective Investments into Stanlib, and of FT NIB, NIBi, BoE and Nedbank's unit trust companies into Nedcor Retail Investments.
