Unit trust investors with larger exposure to higher-risk assets such as equities were not rewarded with higher returns in the quarter to the end of June and, in fact, had lower returns than investors in a number of lower-risk categories, John Orford, a senior portfolio manager at the Old Mutual Investment Group’s MacroSolutions, says.
Returns were severely affected by Britain’s vote to leave the European Union. One-year returns for higher-risk unit trust sub-categories came in well below the annual returns over three years, he says.
South African equities, as measured by the Shareholder Weighted All Share Index, were up three percent in rand terms from the start of the quarter until the outcome of the Brexit vote was announced. They then fell, Orford says, and ended the quarter only 1.3 percent up.
Duncan Artus, a portfolio manager at Allan Gray, says the local equity market is, effectively, an international market, with the fortunes of many big shares unrelated to the South African economy, but affected by global equity sell-offs in times of uncertainty, such as that which occurred post the Brexit vote.
Paul Hansen, Stanlib’s retail investing manager, says a stronger rand resulted in lower returns from rand-hedge shares (which earn a large portion of their profits overseas), such as SAB Miller.
The FTSE JSE All Share Index returned just 0.44 percent for the quarter and 3.84 percent for the year to the end of June. South African equity funds had an average return of 0.48 percent for the quarter and 1.54 percent for the year.
The four best-performing funds over the year to the end of June show that the value or valuation-based managers are making a comeback: the Investec Value Fund (with a stellar 48.57 percent return), the Standard Bank Value Fund, the Investment Solutions Multi-manager Equity Fund of Funds and the Allan Gray Equity Fund.
Orford says that, like local equities, global equities were up 1.7 percent in rands before the Brexit vote, despite the stronger rand, and ended only 0.8 percent up for the quarter.
South African property, as measured by the South African Listed Property Index, was down 0.9 percent before the Brexit vote but ended marginally up by the end of the quarter. Orford says this index does not include Intu Properties and Capital & Counties, JSE-listed British pro-perty companies, that fell hard following the Brexit vote.
Global and local bonds rallied on the back of the Brexit vote, as did gold, traditionally regarded as a safe haven in times of uncertainty.
The returns of the respective asset classes explain why funds with higher exposure to fixed-income assets outperformed those with higher exposures to equities.
Orford says the sell-off in equities immediately after Brexit has largely been reversed, with local and global equities continuing to make gains in the first few weeks of this quarter. Rand strength, however, has resulted in South African equities continuing to outperform global equities in rand terms over the past three weeks.
Anet Ahern, the chief executive of PSG Asset Management, says the worst sell-offs after Brexit were British property stocks and British and European banking stocks. PSG portfolios were not exposed to these sell-offs, because the shares were overpriced. When you own shares at inflated prices, you are more susceptible to losses in the event of unexpected shocks, she says.
Brexit has introduced policy and economic uncertainty in the United Kingdom, which is likely to experience a sharp slowdown in growth over the next year, Orford says. This will have a marked impact on UK-exposed companies, but the broader economic impact of Brexit is likely to be contained, with markets continuing to focus on the United States and China, he says. The most important immediate consequence is that policy makers, including the Federal Reserve Bank, are likely to maintain monetary easing.
Orford says almost a third of global bond markets are offering negative yields, making the yields of emerging-market bonds, such as South African bonds, relatively attractive to investors.
Hansen says the US stock market, as represented by the S&P 500 and Dow Jones indices, moving to a record high for the first time in 14 months, could signal an end to an 18-month up-and-down trading pattern. It is probably because the recession in US company earnings is over. These earnings could show double-digit year-on-year growth this quarter, he says.
Steady US interest rates are also helping, and could help other stock markets, including the JSE, to move up, Hansen says.
The very low bond yields around the world is very good news for global and local listed property and local financial shares, he says.
He says investors globally have been worried about financial markets since the beginning of the year and many have sold out, but they could be enticed back if the markets recover as well as the US has lately.
Ahern says the Brexit fear and uncertainty has created opportunities to buy quality shares, bonds and listed property – though not UK listed property – at distressed prices in the UK and Europe.
Ahern says that in South Africa fears around a potential debt downgrade are priced into many financial and industrial shares on the JSE and PSG has been finding good businesses at very good prices, particularly in the banking sector.
Artus says there are many investment risks besides the impact of Brexit. The most worrying one is that there is no precedent for the greatest monetary experiment in history that central banks around the world are carrying out. He says Allan Gray remains cautious about investing in securities that have benefited from “unsustainable demand borrowed from the future”.
Ahern says diversification is incredibly important given the uncertainty in investment markets. She suggests you diversify globally among asset classes, sectors, shares, credit issuers and fund managers. And don’t write off cash, she says: it provides stability and purchasing power during periods when prices dip.
Artus says the biggest factor in your returns is your own behaviour. Rather than reacting emotionally to short-term market events, you should adopt a long-term approach.
Market volatility can present opportunities for long-term investors to buy securities at attractive discounts, he says.