Equities better than cash
Investors who are tempted to pull out of equities and other types of unit trusts in favour of cash are likely to miss sizeable growth opportunities when equities bounce back, fund managers caution.
Sunel Veldtman, director of Barnard Jacobs Mellet Private Client Services, says with inflation back in double digits and cash returns hovering around 12percent many investors are exiting equities in favour of money markets.
A report by Old Mutual Investment Group shows that South Africans have been piling into cash in unprecedented numbers in the first half of this year, while pulling their investments out of all other types of unit trusts.
The Association of Collective Investments reported record net inflows of R10,2 billion into money market unit trusts in the second quarter of the year, for a total of R19,2 billion year-to-date.
At the same time there have been net outflows of about R5,4 billion from all other unit trust categories so far this year.
With most asset classes - including the "safe haven" option of bonds - posting very poor or negative returns in the first six months of the year, South Africans have followed many investors around the world into cash, experts say.
Worsening the situation is the uncertainty as a result of the current equity volatility, which Veldtman says has complicated the job of picking stocks offering gains that are significantly above cash returns.
Though acknowledging the logic of seeking a "safe haven" with a small inflation-positive return in the short-term, Veldtman warns about the long-term dangers for many investors who exit equities for cash.
"A distinction should be drawn between sophisticated investors who receive timely information on market developments and average saverinvestors whose primary goal is a retirement nest egg to supplement pension fund entitlements," she cautions.
"In the former category many investors are removing some money after five years of large profits and are building cash positions ahead of a return to the market to exploit value opportunities.
But this has placed many 50-something or 60-something saver-investors, who are simply reacting to current sentiment, in jeopardy.
"They think there is nothing wrong with a safety-first instinct because no one has ever warned them that the money market can become the graveyard of effective, long-term retirement planning."
According to Veldtman, another danger is that the ordinary saver-investor is likely to stay far too long in the safe haven, missing sizeable growth opportunities when equities bounce back.
Peter Brooke, head of macro strategy investments at the Old Mutual Investment Group, also cautions against this "dash to cash", urging investors to think twice before pulling all their investment out of all other types of unit trusts in favour of cash.
He says although cash can be a satisfactory short-term solution for some, it is not an optimal solution for most investors. He points to three fundamental problems with cash.
First, because cash doesn't offer any capital growth, it doesn't provide the real growth required for retirement.
Over the past 100 years, cash has produced a real return of only 0,8 percent a year.
As South Africans are well-known for their inability to save, Brooke says the risk is high that all interest coming from a cash investment will be re-directed towards spending, rather than re-invested.
"This danger is particularly high now that consumers are facing a squeeze on their incomes through higher debt servicing, food and fuel costs.
Tax drag is also a worry.
Despite exemptions offered by Treasury, higher inflation rises, the worse the tax burden from interest-based investments like cash becomes, reducing one's real returns.