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Unit trust investors suffer a painful second quarter

AP File Photo/Remy de la Mauviniere

AP File Photo/Remy de la Mauviniere

Published Jul 26, 2022



The second quarter was cruel to investors, forcing them to confront harsh realities after the somewhat surreal ride they’d been enjoying since the market dive at the beginning of the pandemic. The FTSE/JSE All Share Index (Alsi), after hitting record highs at the beginning of March, dropped 12.28% – from 75 497 points to 66 223 points.

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All sectors were down, but resources, which had largely driven the JSE boom, were down the most: the index lost 21.87%. Financials were also hit heavily: down 15.78%.

Interestingly, both these sectors were still up quite significantly over the 12-month period to the end of June (8.49% and 17.57% respectively), while the Alsi was flat.

Representing the global stock markets, the MSCI World Index was down 16.2% in US dollar terms over the quarter to the end of June, but because the rand weakened substantially against the dollar over the quarter, it was down only 7.07% in rand terms. (Note that the rand-dollar deterioration was more due to dollar strength than rand weakness: while the rand lost 12.1% against the dollar, it lost only 3.4% against the British pound.)

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The quarterly figures may be shocking, but if you step back and view the markets over 12 months, the situation may not be as bad as you think – that is, unless we have another quarter like the one we’ve just endured, which is not improbable, given the precarious state of the world economy, raging inflation not seen in decades, and the weakness in our own economy, caused in no small measure by “own goals” such as Eskom.

The one area of the international markets that was in serious bubble territory – and that bubble is deflating – was big tech. The Nasdaq Index, which best represents the big tech stocks, was down 22.5% for the quarter and down 29.5% for the year (in US dollar terms) to the end of June.

Repeat of the Dot-Com bubble?

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In a recent article from PSG, “Tech stocks: are we in the middle of another Dot-Com crash?”, Schalk Louw, wealth manager at PSG Wealth, likens the current tech crash to the Dot-Com crash of 2000.

“The Dot-Com crash was really as a result of three major themes,” says Louw. “First, tech stocks and by implication the Nasdaq, were trading at extremely high valuations (price-earnings ratios, or PEs) in the late 90s and early 2000. Second, the US Federal Reserve started to tighten monetary policy, hiking rates six times between June 1999 and May 2000. And third, this monetary tightening resulted in an economic downturn, followed by a recession.”

You don’t need to be a market expert to note that these themes from the Dot-Com crash are once again prevalent in the current market environment, says Louw.

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“Even after declining by almost a third off its highs, the Nasdaq is still not trading at levels that can be considered very cheap, and history has shown us how PEs can drop and stay low for some time,” he warns.

Louw points out that the damage wrought on investors’ portfolios so far this year really becomes apparent when one looks at individual counters. Pandemic-era market darlings Netflix, Shopify and Zoom fell 70%, 74% and 40% respectively during the first half of 2022. The “mega caps” have not been spared either: Apple is down 23%, Microsoft is down 24%, while Facebook has lost a staggering 53% of its value this year.

“What we do know, for now, is that inflation is still not under control and, according to the Fed, interest rates will continue to increase this year. During the Dot-Com correction, the Nasdaq traded 36% off its highs, six months after the top. Back then, investors asked the same questions we’re asking now, and they were answered 18 months later: the Nasdaq was trading down a further 40%.”

Will this time be different? “We will have to wait and see, but the similarities are stark and extreme caution is advised,” Louw says.

Unit trust performance

According to quarterly results provided by ProfileData, investors in South African Equity General portfolios saw their investments lose 9.18% of their value, on average, over the second quarter. However, the sub-category was still in the black over 12 months, at 6.64%.

The popular “balanced fund” category, South African Multi Asset High Equity, was down 5.47% for the quarter, on average, but up 2.93% for the 12 months to June 30.

Investors in the offshore but rand-denominated Global Equity General funds saw their investments drop by 4.24% over the quarter, on average, and by 8.20% over 12 months.

Those in safer interest-bearing funds have fared little better: longer-term bond funds (SA Interest Bearing Variable Term) were down 2.94% for the quarter, on average, while delivering only 2.65% over the 12-month period.

Finally, listed property, which had made something of a comeback after performing dismally in the years before the pandemic, also succumbed to the overall market malaise: the unit trust funds investing in that sector were, on average, down 11.4% for the quarter while remaining flat for the 12 months to the end of June.

PlexCrown ranking of managers

Ninety One retain their lead at the top of the PlexCrown rankings, according to the PlexCrown ratings of its qualifying funds. It scored an average 3.826 PlexCrowns, with 12 of its 18 qualifying funds earning four PlexCrowns and one fund, the Ninety One Managed Fund, earning five PlexCrowns.

PSG Asset Management has shot up the rankings into second place, with an average 3.802 PlexCrowns for its nine qualifying funds. No fewer than three of them – the PSG Global Feeder Fund, the PSG Diversified Income Fund and the PSG Income Fund – scored five PlexCrowns.

In third place is Prescient, with an average of 3.468 PlexCrowns for its 14 qualifying funds. One of them, the Prescient Balanced China Feeder Fund, earned five PlexCrowns.

Topping the list of offshore managers at the end of the second quarter was Foord Asset Management, averaging 4.500 Plexcrowns on its three qualifying global funds.

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