Core Chartbook 2024: Long-term trends in the CIS industry

Insights

• The CIS industry in South Africa has experienced strong growth over the past three decades.  
• The available product range has expanded significantly over this period with many providers offering funds across different asset classes, geographies, and investment strategies (e.g., active, rules-based, etc)
• Multi-asset, international and income funds have experienced the strongest growth within the industry.

The evolution of the CIS industry over the past 30 years

Over the past 33 years, Collective Investment Schemes (CIS) have experienced a Compounded Annual Growth Rate (CAGR) of over 20%! In 1990 the industry assets were just under R8 billion and were dominated by South African equity funds. Today the industry has over R3.5 trillion in assets and covers a range of local and international funds across multiple asset classes. 

The were several tailwinds that boosted this growth, especially during the 90’s and 00’s. The shift from Defined Benefit (DB) Pension schemes towards Defined Contribution (DC) Pension schemes, created an environment for competition among existing and new independent asset management firms. The rise of retail investment platforms servicing financial advisors that increasingly focused on investments rather than just traditional risk products, also assisted in more assets going into CIS funds. 

Most CIS assets are in funds that hold equity – these include pure equity, multi-asset and international funds. This sector makes up nearly 70% of the CIS industry and has grown by just under 20% since 1990. The Bond and Income funds sector has seen the highest growth over this period, growing by nearly 26% per annum. Money market funds have also seen growth of over 20% per annual since the late 90’s.

*Source: Meyer-Pretorius and Wolmarans, Meditari Accountancy Research Vol. 14 No. 1 2006 : 49-67. Updated using Asisa data from 2010 onward.

The poor economic growth in South Africa over the past 15 years, has impacted the growth of the CIS industry. Since 2015, the annual growth rate of the industry has decline to just 6.4%, i.e. barely beating inflation. Only Bond and Income funds have maintained decent growth rates of just under 15% over this period.           

Growth in multi-asset and international funds

Multi-asset and international funds have seen the strongest growth within the sector of funds that hold equities. Since 1995, multi-asset funds have grown at an annual rate of over 26% while international funds have grown at nearly 30%! 

The Financial Advisory and Intermediated Services (FAIS) act was introduced in 2002, which placed greater responsibilities onto financial advisors to provide appropriate (investment) advice. This led to more investors using risk profiled multi-asset funds which are aligned to return objectives within their financial plans. In 2012 the requirement for member level compliance with Regulation 28 of the Pension funds made multi-asset funds the obvious choice for pre-and post-retirement investments as it was less onerous to manage for investors and their advisors. We have, however, also seen a reduction in the growth rate of multi-asset funds in line with the industry.

Source: Meyer-Pretorius and Wolmarans, Meditari Accountancy Research Vol. 14 No. 1 2006 : 49-67. Updated using Asisa data from 2010 onward

Given the highly concentrated SA equity market, investors have increasingly made use of funds that of provide international exposure to diversify their investment risk across a much larger investment universe. One of the other strong drivers behind the growth in international funds has been the steady increase in the offshore allowance within Regulation 28 compliant funds. The offshore limit has increased from 15% to 45% over the past decade.

The rise of rules-based investing in South Africa

Over the past decade we have seen strong growth in rules-based funds across the major single asset classes and multi-asset funds. The term ‘rules-based investing’ is an umbrella term for traditional market cap index funds, enhanced index funds (e.g. Smart beta), and multi-asset funds which provide low-cost exposure across a number of different asset classes. Rules-based funds are available in both the unit trust and Exchange Trade Fund (ETF) CIS structures. 

In the remainder of this series of articles covering the Nedgroup Investments Core Chartbook 2024, we will look at major trends behind the growth in rules-based funds over the past decade. 

Source: Collective Investment Schemes – ASISA

PART 2: To read the next article in the Core Chartbook series Trends in rules-based investing, click here.

Disclaimer

Please note that Nedgroup Collective Investments (RF) Proprietary Limited is not authorised to and does not provide financial advice. This document is of a general nature and intended for information purposes only. It is not intended to address the circumstances of any investor and cannot be relied on as legal, tax or financial advice, either express or implied. Whilst we have taken all reasonable steps to ensure that the information in this document is accurate and current on an ongoing basis, Nedgroup Investments shall accept no responsibility or liability for any inaccuracies, errors or omissions relating to the information and topics covered in this document. Nedgroup Collective Investments (RF) Proprietary Limited is a member of the Association for Savings & Investment SA (ASISA).