Johannesburg, 30 Sep 2004
Throughout the 1990s, with the global equity markets performing so strongly, it was easy to make money as a portfolio manager. No matter what your investment portfolio looked like, as long as it was relatively well diversified, you were pretty much guaranteed a reasonable return. The investment management and pension fund industries prospered and as a result of the healthy returns generated from the equity markets, these same money managers charged significant fees which they justified as being the cost of their "expert" advice. After all, look at the returns that were being achieved!
No one particularly called into question these fees as the net returns were generally still positive. The fact that the vast majority of fund managers, after their costs were accounted for, significantly under-performed the benchmark indices simply went unnoticed.
However, since 2001, the picture has changed dramatically. Equity markets globally have languished, and the performances of these "experts" have come under significant scrutiny. With these equity markets producing negative returns, and fund managers still charging fees on top of these negative returns, people`s pension funds have simply been decimated. People are understandably unhappy to pay a fund manager 2% or 3% per annum simply to match a general market index which itself is down 5% for the year. And why should they? Why not just go out themselves, pick a basket of stocks and put them in their own investment portfolio or pension fund to save this 2% "expert advice" cost?
After all, everyone should remember the old story of the monkey throwing darts at the stock list and picking a basket of shares which outperformed the "expert`s" basket. People have been forced to take things into their own hands, as the charges levied for expert management has hardly been good value.
This trend of people taking things into their own hands or "self-empowerment" can be readily observed on a global level. Just look at the success of index tracker products such as "Diamonds" and "Spiders", which track the Dow Jones and S&P indices respectively, as well as the success of the SATRIX 40 here in SA.
These products are simply built around the idea of tracking an index and not a particular share and they not only return whatever the index returns but at a minimal cost. In most cases this return is less than 0.25%. Furthermore, they are designed for the "man on the street" and are readily accessible to the private investor. Since most money managers (after their fees are extracted) vastly under-perform the index, it seems logical that these products should enjoy tremendous success.
The phenomenon of self-empowerment in investment decisions is not confined to the equity market. A significant part of the boom in the property market can be attributed to the private investor`s experience with the fund management industry. After seeing a large part of their asset base, in terms of pensions or investment funds under management, obliterated over the course of the last five years, investors are asking themselves why they should be investing in intangible financial products which they don`t understand and which lose them money. In fact, with the same money, investors could have bought a second house or an apartment or anything else which they could actually see, feel and touch.
Property is a natural area of development for the self-empowered investor, as it is something that everyone is both comfortable with and understands. How many people really understand how an inflation-linked government bond, or indeed how a company`s share price is really derived?
Consequently, a large part of the demand in the property market is coming from the investor base. People are buying a second or third house for their pensions, looking forward to receiving a steady rental stream which they can count on as income for their future years, as well as the potential extra return of the asset appreciation. No longer are they subject to the whims of the markets or the vagaries of a pension fund manager`s investment philosophy. And no longer are they subject to their exorbitant charges.
The performance of the equity markets and fund management industry over the course of the last five years will have profound effects on the financial market in the medium- to long-term. The shift to the self-empowered investor is having, and will continue to have, an enormous impact on people`s asset base and investment allocation. To date, the winner has been the property market and the loser has been the equity market with people using their cash to buy property not shares. Going forward, the losers will also be various fund management participants. Do not expect this to change in the medium-term; and while certain sectors such as the property sector seem to be performing incredibly well, do not underestimate the long-term effect a wholesale shift in investment psychology can have on any particular market sector (in this case, away from the religion of equities) - there is plenty of recent history to tell us this.
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