Page 33 - Profile's Unit Trusts and Collective Investments 2021 issue 2

History of Collective Investment Schemes

Lessons from ’69
Bull Market
The crash of ’69 in South Africa was certainly a bad one.
Judged by the JSE Overall index (as the JSE All Share index A persistent and prolonged
was then called), and ignoring dividends, the share market period of rising market
prices.
financial
In
the
took around 10 years to get back to the levels it had reached markets, a “bullish” person believes that
in 1969. Investors who bought at the peak, in May ’69 (and, prices are about to rise. A bull trend is
unfortunately, there were a lot of them) had to wait 10 long therefore a trend that is moving upwards. A
years to see a real return on their investment. Most didn’t period of rising prices could also be referred
wait, choosing rather to take their losses, further fuelling the to as a bull run or a bull phase. The opposite
decline in prices. of a bull market is a bear market.
The crash had long-lasting negative effects. It scared
many people away from excellent investment opportunities
available in the early 1970s, and inhibited the development of
new products for over a decade.
Market Bubble
Yetwiththe benefitofhindsight oneofthe lessons of the A “market bubble” refers to
’69 crash is the resilience of equity markets over time. As they an unsustainable surge in
have in all other equity market crashes, share prices did recover asset prices that has no
and surpassed their former dizzy heights. Other important solid basis. Soaring valuations are
lessons were learned about how not to invest in unit trusts. followed by dramatic collapses. Famous
The worst losses were suffered by investors who got into examples are the Tulip Bubble (1637), the
the market in the final bull phase. Industry asset doubled in South Sea Bubble (1720), and the Dotcom
Bubble (2000). Market mania can take
the last five months of the bull run, and unit prices rose by an several years to play out.
average of 36% at a time when inflation was only 3.4%. The
huge inflows in May meant that many investors had entered
the market at its most expensive. Investors who invested before the final bull phase – or who
staggered their purchases – were not nearly as hard hit when the bubble burst. In fact, an investor
putting a level monthly amount into the market from June 1965 to February 1972 would only have
been in the red for 13 of 81 months, and in only one of those months would the decline in portfolio
value (compared to the amount invested) have exceeded -10%.
With the decline in share prices, share market dividend yields rose significantly. An investor
who entered the market in 1968 and who reinvested dividends and interest income from unit
trusts would have been showing a real return in five or six years. While this might sound like a
long time, it must be remembered that this was against the background of a severe economic
recession and a major share market crash.
Positive effects of the ’69 crash were therefore:
An appreciation of the dangers of market bubbles, and the need to stagger investments,
especially large lump sum investments.
A general acceptance that equity investments, and unit trusts in particular, need to be
treated as long-term investments (ideally five years or more).
More responsible marketing by the industry, which has ever since made a greater effort to
caution investors against the dangers of buying high and selling low.
An Explosion of Funds
Growth in the industry, for all the reasons stated above, was very slow during the 1970s. Only
three funds were launched between the crash of ’69 and the end of the next decade, taking the total
number of funds from nine to 12. Standard Bank launched South Africa’s 13th fund (a gold fund)
in October 1982.
The unit trust industry came to life again in the second half of the 1980s, following the fortunes
of the share market, which had entered a new bull phase.
Twelve funds had been launched in the 15 years between 1965 and 1980. In 1987, as the JSE
followed overseas markets to dizzy heights, 11 funds were launched in one year alone.
By September 1987, industry assets had grown to R4.8bn. From 12 funds in 1979 the industry had
grown to 31 funds by 1989 (most of these launched from April 1987 onwards).

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Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts