For several years the unit trust industry has found new tricks to drive its growth.
Its total assets grew from R125bn to R176bn over the 12 months to March 31, mostly through the proliferation of institutional funds totalling R39,5bn, which now account for 22% of industry assets. In March 2001, institutional assets were not considered large or important enough to be measured separately.
Association of Unit Trusts chairman Bernard Nackan says the growth of institutional funds cannot be bad news for the industry, even though the fees are often far lower than for retail clients. "At least institutional money is more stable and is not subject to the same churn as the retail money."
Dave Stronach, an executive director of Investec Unit Trusts, says the industry needs two healthy legs, institutional and retail. The advantage of direct retail clients is that they are directly "owned" by the management company, unlike clients who invest in them through linked product companies. There has been pressure on debit order investment - Association of Unit Trusts (AUT) CE Colin Woodin estimates that the proportion of inflows from debit orders has fallen from 14% in 1995 to 4% today - but Stronach is confident that unit trusts remain attractive as they are an efficient vehicle with immediate liquidity .
There has also been a shift away from domestic equity funds. Five years ago, the general equity funds accounted for 63% of industry assets, or R30,9bn. Five years later the asset base of general equity funds has declined to R30,3bn and they account for barely 17% of industry assets.
Part of this decline can be explained by the introduction of the growth and value funds, which hold R6,4bn of assets that were previously classified as general equity funds. But the main reason has been the huge growth in popularity of the fixed interest and international funds. This indicates that investors have lost some confidence in the JSE, not so much because of its absolute performance but because of its continued volatility.
And there has been even more disillusionment in certain fund sectors, most dramatically the small companies funds, whose share of domestic equity assets has fallen from 15% to 3% over four years.
On March 31 2002, domestic funds still accounted for 79% of industry assets. The international funds (subdivided into worldwide, foreign and regional funds), arguably would have an even higher proportion of the total if it were not for the constraints of the foreign exchange regulations. Asset managers may hold only 20% of their assets offshore.
Coronation Unit Trusts head Pieter Koekemoer says there has been leakage into offshore funds. When rand-denominated international funds were readily available, there was little incentive to make use of the personal offshore allowance, now R750 000. Over the past two years, as more rand funds have closed for new business, more than R25bn is held by individual investors in foreign collective investment schemes, as offshore funds are more formally known.
And Koekemoer says a stagnant local economy has meant little, if any, growth in the savings market, especially when emigration is taken into account.
Nackan says the industry has overemphasised the domestic equity component of the business in the past. It has underplayed the role of fixed interest funds and in particular of money market funds, which offer attractive rates of interest relative to the banks, with no capital risk.
The past year has seen a proliferation of hybrid fixed interest funds. But Koekemoer says these new funds often have limited distribution. The linked product companies are cutting back on their menus and are reluctant to offer new funds on their platform - unless they belong to a sister company.
It is not surprising that linked product companies want to cut off the marginal tail of unit trusts. Even in the US, 95% of net inflows in 2000 were accounted for by 20 of the 450 mutual fund houses.
Yet in SA the consolidation has not been among smaller management companies but at the top. Investec absorbed Fedsure in the most complex fund consolidation and closure exercise in SA. Liberty and Standard Bank are now merging their unit trust companies.
Yet in both cases, the driver of the merger has been corporate action by the mother company rather than problems at the unit trust house itself.
Unit trust companies have thinner margins than their banking and insurance parents, but they play a critical role as a shop window into the house's asset management skills and product capability. Even if their returns to shareholders are mediocre, unit trust companies are never voluntarily killed off.
There are certainly signs that the unit trust industry is mature and stagnating.
But Nackan says that even the domestic equity side of the business has potential. In recent years the unit trust industry's share of the JSE market capitalisation has remained about 4%. In many other countries it accounts for 20% or more.
The next holy grail is the retirement market, in which assets are not subject to the same leakage overseas as they are in the discretionary savings market.
The US mutual funds, as unit trusts are called there, have been the fastest-growing segment of managed assets over the past 10 years, with a 20% compound annual growth rate. The industry has US20 trillion in assets, of which $13bn is retirement assets. Many of these are held in 401(k) plans, defined contribution plans with personal choice, the majority of choices being mutual fund products.
In the UK the Individual Savings Account (ISA) is not strictly a retirement product, but it is a tax-efficient savings scheme that gives some shelter from capital gains tax and tax on interest income.
ISA wrappers now account for 38% of retail sales in the UK and 80% of 2,1m regular savings plans are in an ISA wrapper.
Association of Unit Trusts executive vice-chairman Di Turpin is a vocal advocate for a tax-sheltered savings plan in SA and she expects unit trusts, the most visible products in the regular investor's mind, to dominate this business.
Government might insist on a couple of conditions before agreeing to these plans. One might be to keep overall costs low, in line with the UK Stakeholder pensions, which must keep their overall cost at 1% of assets.
The other could be to move more actively into the mass market, which the unit trust industry has neglected. For an ISA to gain credibility in SA, minimum investments should be set at R50-R100 a month.