Two decades after the crash of 1987, the world saw another major conflagration in equity markets, caused by a global credit crunch led by the collapse of various debt instruments linked to property (the sub-prime crisis). This followed a sustained 20-year rise in asset prices.
The Bull Run that effectively started in December 1987 (after the short, sharp crash of the same year) was truly spectacular. The DJIA rose some 550% from 1988 to 1999. In South Africa the JSE’s All Share index rose 450% from February 1988 to April 1998, before declining sharply (nearly 44%) in six months.
This fall was followed by another quick recovery which, apart from a major ‘correction’ in 2002/3 (the DJIA and Alsi fell 35% and 37% respectively), continued until late 2007. In the US, markets peaked in October 2007: in SA the JSE enjoyed a final burst which took it to record levels in May 2008 – 20 times what it had been in February 1988.
As with the crash of 1987, the market declines in 1998 and 2002/3 had a relatively muted impact on the unit trust industry. In 2002, total industry assets still rose 3% in spite of an 11% fall in equity prices over the calendar year – although in the decade from 1992 to 2001 industry assets grew by 32% per year, on average. From 2003 to 2007 industry assets again grew at almost 30% per annum.
In spite of 2008’s 26% decline in the JSE’s All Share index and global fears of an economic meltdown comparable to the crash of 1929 (which led to the Great Depression of the ‘30s), industry assets still managed to show 1% growth in 2008, testimony to the newfound resilience of the nit trust industry and the hard-earned wisdom of investors. As in 1987, may seasoned investors who had been in the market for decades had confidence that markets, given time, would recover, and some investors saw the decline in equities as an opportunity to get into the market at favorable levels.
The number of rand-denominated collective investment schemes has increased steadily – at the end of December 2015 there were 1152 funds available to retail investors and another 175 institutional funds (many of which are available indirectly in the retail market). In addition, 370 foreign currency denominated funds were registered with the FSB at the end of 2015.
The Impact of Technology
As in most areas of the modern world, technology has had a significant impact on the evolution of collective investment schemes.
The explosion of products seen in the 1990s was partly due to the development of sophisticated computer systems which made the administration of CISs relatively easy. Most aspects of the administration of a unit trust, for example, depend on computer systems, from calculating daily NAV prices to managing asset allocation, from administering repurchases to allocation of interest and dividends. Computer systems became more user-friendly and more widely available, the systems requirements for setting up and managing unit trusts became less of a barrier to entry, allowing new, smaller companies to launch unit trusts, and allowing the larger institutions to manage multiple unit trust offerings with comparative ease.
The impact of technology was not only felt in the “back office”, however. While administration of unit trusts was getting easier, technology was also creating new opportunities for fund managers.
Modern, sophisticated computer systems give fund managers far more control over portfolios than their counterparts of four decades ago. Tracker funds and EFTs are good examples of products that would not exist were it not for the advances in data processing and automation of computer systems. These popular products rely on the fund manager’s ability to construct a portfolio which mimics, as far as possible, the composition of a major index (such as the JSE’s Top 40 index, for example). Calculating the correct proportions of each stock holding on a daily basis in the face of day-to-day changes in share prices – and generating orders early enough to ensure they are filled – is dependent on computer systems.
Products such as hedge funds are also highly dependent on technology from an asset management point of view. A fund manager making extensive use of derivatives may seek to adjust his portfolio on an hourly rather than a daily basis, and this constant and rapid adjustment of asset allocation via derivatives frequently depends on automated trading. For most South Africans hedge funds remain esoteric, but these products have had a huge impact overseas. Although the proliferation of hedge funds worldwide was sharply curtailed by the crash of October 2008, growth in the number of hedge funds and assets under management has continued since 2010.
Technology has had a major impact on the way in which financial advisors do their jobs. Four decades ago financial advisors were completely dependent on printed literature issued by management companies. Today, it is almost unheard of to encounter a financial advisor not equipped with a notebook computer, on which detailed information about clients and products will be available. Armed with his notebook PC and an internet connection, the modern financial advisor can download details of a client’s holdings, access up-to-date information on products, print the latest application forms, and, for some products, submit a proposal electronically without lifting a pen.
The internet has, of course, also had an impact on investors. This goes beyond the immediate access of up-to-date information which the internet offers. The breadth and depth of information now available enables well-informed investors to make product comparisons and to conduct independent research.
The accessibility of the internet led to speculation in the late ‘90s that the character of the industry would change, because of ease of access, to point where most transactions in the CIS industry would occur directly between investors and management companies (or LISPs), and that the role of financial advisors would diminish. This has not proved to be the case, and in fact some of the early attempts to launch online “investment supermarkets: were unable to attract sufficient business to cover costs. It appears that, in South Africa at least, collective investments are still “sold” rather than “bought”, and the industry has recognized the important role played by financial intermediaries. Having said that, it must be recognized that in the USA, albeit a more sophisticated market, there are several websites offering direct trading of collective investments, and these companies appear to be operating profitably.
There seems little doubt that technology in general – and the internet in particular – will continue to have an impact on collective investments. The many websites offering detailed up-to-date information in a wide range of products will lead to investors who are better informed and more likely to question and challenge the advice of financial intermediaries. Better informed investors may also turn out to be more cost-conscious investors, and the greater transparency which characterizes internet delivery of information may lead to consumer demand for more cost-effective products.