The unit trust industry this week celebrated its successes at the 17th Raging Bull Awards after a year of pleasant surprises in the financial markets.
Although most asset managers had been expecting lower returns in 2012, there was a bull market in local and foreign equities, as well as in the domestic bond and property markets.
Despite it being what Investec described as “an uncomfortable bull market”, because it was at odds with expectations and occurred against the backdrop of the financial crisis and economic stimulus packages, many of South Africa’s established managers, as well as a number of boutique and offshore managers, were well positioned for the markets’ surprises.
The managers that delivered the top returns collected Raging Bull Awards at this week’s event in Johannesburg sponsored by Personal Finance, ProfileData and PlexCrown Fund Ratings.
The awards honour not only the managers who achieved the best returns over three years, but also those who proved able to deliver consistent returns without taking too much risk over five years.
The five-year period to the end of last year began in 2008, the year of the global financial crisis.
The period since the crisis has been dominated by investors searching for higher yields as central banks in many parts of the world have kept interest rates low to stimulate an economic recovery.
Large amounts of investors’ funds have flowed into emerging markets, including our own, and this has resulted in the South African bond market producing incredible returns.
Local and global equity markets recovered in 2009 and 2010, but this was followed by a retreat in 2011 and then a bull market in 2012. The five-year period has really tested managers’ abilities under a variety of market conditions.
Three companies competed hotly for the most coveted award, the Raging Bull Award for the Domestic Management Company of the year, which honours the best risk-adjusted performance over the five years to the end of 2012 across the manager’s range of funds.
The award went to Coronation Fund Managers, but the company achieved only a slim lead over Allan Gray, the manager that has won the award for the past four years in a row. Allan Gray in turn led by a slim margin over the company that took third place in the company rankings, Nedgroup Investments.
A narrow 0.2 points separated the scores of the top three companies, Ryk de Klerk, managing director of PlexCrown Fund Ratings, told guests at this week’s ceremony. PlexCrown provides key calculations for the awards.
Coronation is the second-largest manager of South African unit trusts (other than money market funds), with R376 billion under management.
Its investment philosophy is to invest for the long term in shares and other securities that are mispriced and trading at a discount to the long-term business value.
In addition to winning the award for the management company of the year, Coronation’s Balanced Defensive Fund won the Raging Bull for the Best Domestic Asset Allocation Prudential Fund on risk-adjusted performance over five years to the end of December 2012.
The manager also collected four certificates for top-performing funds.
Pieter Koekemoer, Coronation’s head of personal investments business, says most of the news in 2012 was bad, from the ongoing fall-out from the 2008 financial crisis subduing the economic outlook for the developed world, to South Africa’s continuing decline in competitiveness.
However, financial markets proved to be surprisingly resilient, Koekemoer says, with the local equity market up 27 percent over the past year and the bond market up 16 percent.
Coronation is of the view that these good returns should be interpreted as “front-loading of long-term returns, rather than confirmation to revise long-run return expectations upwards”, he says.
Quinton Ivan, Coronation’s head of equity research, says there is “a disconnect” between financial markets, which are rising, and the global economy, which remains in a precarious state. As a result, Coronation expects returns over the next decade to be more muted, he says.
Many of the tailwinds that buoyed returns are unlikely to be repeated: local asset prices are high, corporate earnings are high and local fundamentals are deteriorating as evidenced by the size of the current account deficit, service delivery protests and the risk of inflation rising due to increases in wages and administered prices, such as electricity, Ivan says.
Domestic equities remain fully valued, while global equities are discounting some of the concerns over Europe, government indebtedness in the major economies, political brinkmanship in the United States and an economic slowdown in China, he says.
Tony Gibson, head of Coronation’s international business, says global equities’ decent returns in 2012 were a consequence of the lack of attractive alternatives available to investors.
With low interest rates, it stands to reason that equities paying dividends in excess of long-term government interest rates must attract buyers, Gibson says.
Investors will reluctantly but steadily reach the conclusion that owning shares in a debt-free company that pays a growing dividend of three percent is “infinitely more sensible” than lending money to a debt-laden government at a yield of 1.5 percent, he says.
Gibson says 2013 will be another troubled year in offshore markets, but Coronation’s view is that the US economy will continue to recover, although economic statistics may be “patchy”, and the eurozone will still have 17 members despite it being far from clear that the zone’s economies will create enough growth to cut soaring unemployment and resultant social unrest.
Ivan says markets are likely to remain volatile and challenging in the near future, making the stock-picking skills of your manager much more important.
In these market conditions, investors need a long-term investment horizon, because the prices of shares and other securities are often determined by the news of the day, he says.
Allan Gray says a number of objective measures indicate that, despite “a laundry list of worries, ‘Mr Market’ is today conducting his affairs with somewhat less prudence than perhaps he should”.
Ian Liddle, Allan Gray’s chief investment officer, says the inflation-adjusted Shiller price to earnings (p:e) ratio on the Standard & Poor’s 500 Index is 22, compared with its long-term average of 16. The long-term ratio measures average annual profits over the preceding 10 years.
He says the inflation-adjusted Shiller p:e ratio on the FTSE/JSE All Share Index (Alsi) is 19, compared with its long-term average of 14.
Liddle says investment guru Warren Buffett has warned that investors cannot predict how long excesses in the market will last, but “we do know that the less the prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs”.
He says the p:e ratios of the S&P500 and the Alsi suggest that caution is called for if investors follow Buffett’s advice.
Acting prudently while many around you are not is hard to do, because it can result in years like Allan Gray just experienced in 2012 – years in which satisfactory absolute returns lag behind peer benchmarks, Liddle says.
“Investors should be careful not to unconsciously lower their risk standards in a chase for yield. Spells of short-term under-performance are the price one pays for long-term out-performance.”
HOW THE RAGING BULL AWARDS ARE DETERMINED
The Raging Bull Awards recognise the top unit trust funds in terms of both outright (straight) performance and risk-adjusted performance.
The top funds based on outright performance over three years in most domestic, rand-denominated foreign and offshore unit trust sub-categories receive a certificate, and Raging Bull Awards are made in the sub-categories or sectors that attract the most money.
Other certificates and Raging Bull Awards – particularly for the asset allocation funds and funds in the more popular sub-categories – are awarded on the basis of risk-adjusted returns over five years, as measured by PlexCrown Fund Ratings. Risk management is a major factor in determining a fund’s success.
To qualify for a Raging Bull Award or certificate, or to be included in the PlexCrown ratings, a fund must:
* Be open to retail investors.
* In the case of an award made on the basis of outright performance, be in a domestic unit trust sub-category (including South African-domiciled foreign funds) that has at least five actively managed funds with histories of three years or more.
* In the case of an award made to a foreign-domiciled (non-rand-denominated) fund on the basis of outright performance, be in a sub-category that has at least six actively managed funds with histories of three years or more.
* In the case of an award made on the basis of risk-adjusted returns, be in a major asset allocation sub-category, or in one of the other larger sub-categories.
Sub-categories that have at least five actively managed funds with histories of five years or more are included in the awards.
For the purposes of the awards for performance to the end of December 2012, the domestic equity growth funds were included in the domestic equity general sub-category, because the growth sub-category had too few funds with a history of at least five years to qualify.
Growth and value funds have the same investment universe as general equity funds, and from this year these two sub-categories have been incorporated into the general equity sub-category.
* Not be a passive or index-tracker fund.
* Not be a money market fund.
* Not be a Fundisa fund.
* Not be in a varied specialist sub-category or in the domestic asset allocation targeted absolute and real return sub-category where investment mandates differ widely.
* Not have changed sub-categories during the past year.
* In the case of offshore funds, have been registered with the Financial Services Board for at least three years.