Ups, but mainly downs, for investors

Illustration: Colin Daniel

Illustration: Colin Daniel

Published Oct 17, 2015

Share

Returns from local equities diverged further in the quarter to the end of September as investors favoured shares showing upward price and earnings momentum over those regarded as value buys.

This resulted in a greater disparity in the returns achieved by collective investment scheme managers with different investment styles.

In the South African general equity fund sub-category over the past year, there was a 50-percentage-point difference in the returns between the best- and worst-performing funds.

Ben Jooste, the head of retail investments at Investment Solutions, says the investment style a manager or fund follows has had a massive impact on recent returns.

Nadir Thokan, an investment analyst at multi-manager 27Four, says the gap has widened as a result of the massive discount that value-style shares are trading at relative to momentum-style shares on the local market.

Peter Linley, the manager of the Old Mutual Investors Fund, says economic uncertainty globally resulted in the more defensive quality and low-risk shares outperforming cheaper value shares. The quality and low-risk shares were favoured by managers seeking price and earnings momentum.

Thokan says concern about United States interest rates, Chinese economic growth, the local economy and local consumer spending have all been very negative for cyclical businesses, and funds with exposure to shares in these businesses have not fared well.

This has divided the market into two camps, with value funds in the camp at the bottom of the performance table for periods up to a year and longer, Thokan says.

The value investing approach is highly favoured by local fund managers, but focusing exclusively on value would have resulted in a fund underperforming in the past quarter, Linley says.

Funds applying a more holistic approach, taking the quality of the company into account and considering the risk of the share, would have had a successful quarter, he says.

A manager who focuses only on the intrinsic value of a business, the relative value of the business and its dividend yields, sees only half the picture, Linley says. Managers also need to consider market sentiment and how that affects the change in the price of a share, the earnings growth of the share, and quality factors, such as the cash-flow return on investment and the volatility of the share.

Ryk de Klerk, the director of PlexCrown Fund Ratings, says the game changers among domestic equity-related funds during the quarter to the end of September were the bid for SABMiller, the meltdown in the resources sector of the JSE and the sell-off of the rand.

SABMiller ended the quarter 23.6 percent higher, the FTSE/JSE Resources Index slumped by 20.2 percent, while the US dollar gained 12 percent against the rand, he says.

Of the 140 South African general equity fund managers, only 10 earned positive returns this past quarter, and while the best performer eked out a positive return, the worst performer lost almost 13 percent, according to ProfileData.

The past quarter’s performance compounded differences over the past year, resulting in the top-performing Anchor BCI Equity Fund, earning a return of almost 33 percent, while the worst performer, the Investec Value Fund, lost more than 23 percent.

The once top-performing Inves-tec Value Fund is a “deep value” fund. Its manager, John Biccard, says this is the fourth year value shares have underperformed – the longest down cycle since 2000. However, he remains committed to value and believes the fund’s gold and platinum positions will yet deliver.

Deep value managers buy very cheap shares that are very out of favour in the market.

Jooste says funds such as the Investec Value Fund, the Momentum Value Fund, the RE:CM Equity Fund and the Element Earth Equity Fund have invested in resources shares, because they see value in this area of the market now.

The resources sector is showing huge losses over all the measurement periods up to seven years. Specialist equity funds that invest in resources shares showed an average loss of 31.7 percent for the year to the end of September. The benchmark index for these funds, the FTSE/JSE Resi 10, is showing a return of minus 36.42 percent for the year to the end of September.

As an ordinary investor, you are unlikely to be invested in these specialist funds, but the extent to which your fund manager has had exposure to resources shares may be a reflection of the manager’s style and will have influenced your fund’s returns.

Thokan says the 27Four Shari’ah Active Equity Prescient Fund managed to deliver a positive return over the quarter, the 12-month and the three-year period to the end of September, but many other shari’ah funds were heavily exposed to resources shares and hence performed poorly, particularly this past quarter.

Among the big losers over the past year are funds that track the FTSE/JSE Dividend Plus Index – an index of shares with the best one-year dividend-yield forecast (the dividends expected over the coming year as a percentage of the share price). The Satrix Divi Plus Portfolio lost almost 13 percent over the quarter and is down 8.79 percent for the year to the end of September.

Thokan says high-dividend-yielding shares benefited from a demand from global investors who moved out of investments paying low interest rates in countries such as the US. Although the outlook in the US has changed somewhat since the end of September, economic conditions during the past quarter appeared to be strong enough for the Federal Reserve to consider increasing interest rates. Speculation that interest rates in the US would rise led to investors selling off higher-yielding assets in the local market, such as the high-dividend-paying shares.

The FTSE/JSE All Share Index was down 2.13 percent for the quarter, but the Shareholder Weighted Index (Swix) was down double that and is a fairer benchmark because it reflects shares that are available to local fund managers.

Thokan says that equity managers whose funds earned zero return or lost less than 1.5 percent over the past quarter have therefore done very well.

In contrast to the performance of the Satrix Divi Plus, the NewFunds Momentum Equity Fund, in the South African equity large cap sub-category, was the top performer in its sector, returning 15.28 percent for the year to the end of September.

Jooste says a good example of a manager who has captured price and earnings momentum in the South African general equity sub-category is the Investec Equity Fund. This fund achieved a return of 17.47 percent over the year to the end of September.

The top-performing fund in the South African general equity sub-category over the past three years to the end of September was the 36One Met Equity Fund, with an average annual return of 21.6 percent.

Hennie Loubser, a member of the 36One investment team, says although the manager leans towards a value approach, it owns a balanced selection of value, growth, contrarian, momentum and “turn-around” shares, as opposed to dogmatically pursuing a single investment style.

He says that over different periods, the market favours different investment styles, and this is why 36One believes its portfolios are optimised to perform well at current market valuations.

Among funds that invest in offshore markets, returns are also diverse: over the year to the end of September, the top-performing fund, the BlueAlpha BCI Global Flexible Fund, returned 21.10 percent, while the RE:CM Global Equity Feeder returned minus 21.61 percent.

The Old Mutual Global Equity Fund, which takes small bets against the MSCI World Index in line with a number of themes, is the top performer over both the three- and five-year periods, with an average annual return over five years of 29.25 percent.

Many funds, however, failed to outperform the MSCI World Index over all the periods.

Jooste says there is a much wider universe of shares in global equity markets, but active managers have struggled in these markets too, and the ones that have performed well are not value managers.

WAS YOUR FUND A LOSER?

Fears about the economic slowdown in China, expectations of a rate hike that failed to materialise in the United States and, locally, economic woes and financially stressed consumers all weighed heavily on financial markets, and consequently many unit trust funds, this past quarter.

Globally, stock exchanges had one of their worst quarters since the 2008/9 financial crisis, with average losses of 12.9 percent, while emerging markets plunged (minus 17.8 percent) following a rout on the Shanghai Stock Exchange and a string of negative news flowing out of China, Foord Asset Management says.

The FTSE/JSE All Share Index showed a loss of 2.13 percent for the quarter (according to ProfileData). According to Foord, the reason this figure wasn’t worse was that it was buoyed by the dual-listed industrial rand-hedge shares SABMiller, Richemont, British American Tobacco and Steinhoff. Resources shares, however, fell 16.72 percent over the quarter.

Almost half of the nearly 1 000 unit trust funds in South Africa are showing losses for both the past quarter and the past six months in the performance tables to the end of September.

About 100 funds are showing losses for the past 12 months, but longer-term returns remain positive.

Investors in global real estate, global equity and local real estate funds, in particular, have been well rewarded in both the short and long term.

Over the past five years, the average annual return earned by a South African general equity fund was 11.89 percent, and multi-asset funds that invest across the asset classes and can have up to 75 percent in equities, earned average annual returns of 11.88 percent.

Investors in rand-denominated global real estate funds earned average returns of 22.2 percent a year, and global equity investors earned average returns of 20.81 percent a year over the past five years.

These returns were boosted by the weakening of the rand over five years, which depreciated 98.7 percent, from R6.95 to R13.82, against the US dollar.

Local listed property funds were again the top performer on average returns over the past year (25.87 percent) and over five years they have produced an average annual return of 18.05 percent.

Ben Jooste of Investment Solutions says real estate shares locally and globally have benefited from the fact they have been able to offer investors higher yields than cash and bond investments, because interest rates around the world are very low.

Jooste says the valuations (a company’s share price relative to its earnings) of property shares have meant the shares are expensive, making it difficult for managers to decide whether to invest.

However, as interest rates have remained low, returns have been good, despite the high valuations.

If you can invest in listed property and just live off distributions, it may still be a good strategy, but you should not expect to invest in listed property and continue to earn such high returns; after such strong performance you should expect lower returns in the future, Jooste says.

Related Topics: