Only 22% of shares on the JSE deliver bond-beating returns ‒ study

By Martin Hesse Time of article published Sep 23, 2021

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A reason that many equity fund managers don’t beat market indices over the long term may be because such a small portion of shares on the stock market deliver higher returns than bonds.

A landmark study in the US by Professor Hendrik Bessembinder of the University of Arizona showed that between 1926 and 2016 just 4% of listed companies accounted for the entire excess return of the US stock market relative to that of US government bonds. Recent research by Morningstar this year showed a trend along the same lines.

Now research by Old Mutual Investment Group (OMIG) portfolio manager Maahir Jakoet and performance analyst Zaahidah Waggie shows that, while not as extreme, the same phenomenon applies to the JSE. Jakoet and Waggie conducted a study looking back 10 years comparing the FTSE/JSE All Share Index (Alsi) and the All Bond Index (Albi), to assess the similarities between the South African market and the US when it came to the small percentage of stocks that have delivered market outperformance over time.

They found that almost 80 percent of the shares on the JSE underperform the bond market, while offering a higher level of risk or, to put it another way, 22% of shares were responsible for the Alsi’s performance relative to the Albi over 10 years.

Thus the secret to fund managers achieving market-beating returns, according to Omig, is to have an actively managed concentrated portfolio with a clear focus on identifying future market winners as an investment strategy, rather than avoiding the losers.

OMIG’s research shows that a concentrated, actively managed equity strategy that seeks to identify the ultimate winners over time has the potential to beat standard market indices by 50% annually.

The findings highlighted that it was the more stable and quality-driven companies in the market that drove outperformance and it is these companies that have stood the test of time and will continue to do so.

“These extreme winners provide positive skewness and have a huge impact on the overall market return. Adjusted for these extreme winners, most shares in the index underperform the Albi,” says Jakoet.

Over the 10-year period studied by Jakoet and Waggie, of a total of 265 shares, 88 shares remained in the index for the full period (permanent residents). Of these permanent residents, only 35 (40%) outperformed the Albi on an individual basis.

“Furthermore, we looked at what the best 10 percent (nine shares) of the permanent residents contributed to the performance by constructing an equally weighted buy-and-hold portfolio,” says Jakoet. “The portfolio over the 10 years would have returned 21% annualised, outperforming the Albi by 13%.”

Over the same period, of the full basket of 265 shares, only 22% (58 shares) outperformed the Albi.

Jakoet says while a diversified portfolio can have benefits for certain investment appetites, it can be considered a “glorified index”, because holding so many shares essentially mirrors the index’s trajectory. “But a concentrated active portfolio is made up of a portfolio manager’s best ideas, which can comprise of this small handful of outperforming stocks, rather than a broader number of stocks, which risk bringing down the portfolio’s average performance,” he says.

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