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Managed equity funds vs ETFs

How did their performances compare in 2012?

ORAPA – Unit trust fund managers have a hell of a job. That should be acknowledged from the outset. They are responsible for millions of rands of other people’s money, and most of them work incredibly hard to do the best they can for it.

They scrutinise companies and markets every day, looking for patterns, pitfalls and opportunities. They gather as much information as they can and then still have to be brave enough to back their instincts because there are very few guarantees when it comes to investing.

And, yet, after all of that, the cynics of the world come along and wonder if it’s really all worth it.

Because last year, the two best performing collective investments in South Africa were index tracking exchange traded funds (ETFs) – the Satrix INDI and the NewFunds eRAFI SA Financial 15.

However, one should avoid being too simplistic about this. Just because two indices outdid every fund manager in the country, does not mean that all those fund managers are wasting their time. Managed funds have their place because, as Dave Foord of Foord Asset Management says, “the primary job of the fund manager is asset allocation”. Put another way, fund managers have brains. Indices don’t.

Indices tend to be reactive, while fund managers can anticipate market movements. They don’t always get it right of course, but at least they have the chance. And the really good asset managers prove themselves over the longer term, not just 12 months.

Nevertheless, fund managers all set themselves targets and many of those targets are index-related. Especially in a world where passive ETFs usually offer lower costs, it is important for their marketing efforts that they are able to beat index trackers.

So how did South Africa’s fund managers do in comparison with ETFs last year?

General & large cap equity

Most local ETFs are large cap funds, as they concentrate on variants of the Top 40 index. However, there are only a handful of managed large cap funds, and so it is more interesting to compare the ETFs with a wider universe.

For the purposes of this article, we have therefore looked at general and large cap equity funds together. In the new classification of unit trusts introduced for 2012, growth funds and value funds are also now considered general equity funds, and so we have treated them as such.

When combining the funds from all these categories, two ETFs would make it into the top 10. The best of them, the NewFunds NewSA Index Fund, ranks fourth, while the Nedbank BettaBeta Equally Weighted Top40 comes in seventh. In other words, only three funds out of 108 beat the NewSA index last year, and only five beat the equally weighted top 40.

The top 10 funds in the combined general, large cap, value and growth categories are listed below:

Fund Total return TER (Q3 2012)
Mazi Capital MET Equity Fund 35.25% 1.21%
Stanlib SA Equity Fund 34.25% 1.14%
Sasfin Vale Fund 33.82% 1.48%
NewFunds NewSA Index Fund 32.76% 0.93%
Harvard House MET General Equity Fund 32.38% 1.49%
Old Mutual Active Quant Equity Fund 31.52% 1.13%
Nedbank BettaBeta Equally Weighted Top40 ETF 31.11% 0.40%
Melville Douglas High Alpha Equity Fund 31.07% 2.61%
RMB Private Bank Equity Fund 31.03% 0.59%
Capstone MET Equity Fund 30.02% 1.50%

Source: Morningstar & Moneyweb

The majority of the other ETFs that fall into this sector also come out reasonably well.

The Satrix SWIX TOP 40 and the Stanlib Swix 40 both returned 27.49% last year. This puts them comfortably in the top 20%, as only 18 managed funds did better.

A little further down the list, the Satrix DIVI posted a return of 25.72%, which slots it into the top 25% of funds analysed.

Only 28 of the 108 managed unit trusts beat the Satrix 40 and the Stanlib Top 40. Only 26 beat the RMB Top 40, which marginally out-performed the index.

The Satrix RAFI and the NewFunds eRAFI Overall SA Index Fund both returned 23.1% last year. This was below the return of the Top 40, but was still better than 58% of all managed funds.

All ten of the above ETFs also beat the average (median) return of the 108 funds in this category, which was 22.45%.

The final ETF in this sector, however, didn’t come out quite so well. The NewFunds Shariah Top 40 Index Fund delivered a return of 15.34% for 2012. This put it in the bottom 25% of funds analysed.

What is also interesting to note is that over five years, the Satrix DIVI is the best performer in this category. Its annualised return of 16.03% is better than the 15.57% of the Marriot Dividend Growth Fund and the 14.55% of the Coronation Top 20 Fund. Next best on the list is the Foord Equity Fund at 12.90%.

The Satrix SWIX and the Satrix 40 have given annualised returns over the last 60 months of 9.28% and 8.31% respectively. In the case of the SWIX, this is a better return than 59 of the 81 funds that have been around for that long, putting it in the top 30%.

The Satrix 40’s performance also puts in in the upper half of the category. It beat 58% of managed funds over the last five years.

Financials

As already mentioned, the NewFunds eRAFI SA Financial 15 beat every managed fund in the country, so it obviously tops the list in this category. The performance of the Satrix FINI, meanwhile, was only bettered by one managed unit trust.

There are only five managed funds in this category. They are compared with the two ETFs in the table below:

Fund Total return TER (Q3 2012)
NewFunds eRAFI SA Financial 15 Index Fund 42.05% 0.62%
Nedgroup Investments Financials Fund – R 39.84% 1.33%
Satrix FINI Portfolio 35.94% 0.46%*
Coronation Financial Fund 35.86% 1.45%
Momentum Financials Fund 34.60% 1.44%
Old Mutual Financial Services Fund 33.70% 1.15%
SIM Financial Fund 33.10% 1.70%
Stanlib Financials Fund 32.10% 1.70%

Source: Morningstar & Moneyweb

*Latest figures are for Q2 2012

Over five years, however, the Satrix FINI comes in bottom of the pile. Its annualised return of 9.34% puts it below every managed fund in this sector.

Industrials

As with the financials funds, there are only five managed funds in this category. All of them are listed in comparison with the two ETFs in the table below:

Fund Total return TER (Q3 2012)
Satrix INDI Portfolio 43.51% 0.46%*
Stanlib Industrial Fund 37.54% 1.13%
Coronation Industrial Fund 35.59% 1.17%
SIM Industrial Fund 33.20% 1.14%
NewFunds eRAFI SA Industrial 25 Index Fund 30.67% 0.59%
Old Mutual Industrial Fund 26.20% 1.15%
Momentum Industrial Fund 22.80% 1.45%

Source: Morningstar & Moneyweb

*Latest figures are for Q2 2012

What’s interesting here is that, in complete contrast to the financials, no managed fund in this sector beat the index over the last five years. Annualised, the Coronation Industrial Fund has returned 15.76% over that period and the Stanlib Industrial Fund 14.13%. The Satrix INDI has delivered annualised returns 16.81%.

Resources

Resources had a pretty horrible time of it in 2012, so one would hardly say that any funds in this category covered themselves in glory. Yet, we have another ETF at the top of the pile, and emphatically so. The NewFunds eRAFI SA Resources 20 Index Fund returned more than double that of any the managed funds:

Fund Total return TER (Q3 2012)
NewFunds eRAFI SA Resources 20 Index Fund 10.17% 0.53%
Investec Commodity Fund 4.80% 1.17%
Nedgroup Investments Mining & Resources Fund 4.70% 1.17%
Stanlib Resources Fund 4.10% 1.14%
Coronation Resources Fund 2.50% 1.22%
Satrix RESI Portfolio 2.25% 0.46%*
SIM Resources Fund -2.20% 1.86%
Old Mutual Mining & Resources Fund -3.00% 1.15%
Stanlib Gold & Precious Metals Fund -6.20% 1.20%
Old Mutual Gold Fund -14.50% 1.16%

Source: Morningstar & Moneyweb

*Latest figures are for Q2 2012

Over five years the Satrix RESI has given an annualised return of just 0.46%. Only two of the eight managed funds that have been around that long have done worse.

Real estate

Listed property has been one of the big stories on the JSE over the last five years. Last year was another fantastic one for the sector, and here managed funds more than held their own against the ETFs.

Of the 22 managed unit trusts in this category, 7 beat the Property Index Tracker SAPY and 16 came out better than the Property Index Tracker Top Ten.

Over five years the Property Index Tracker SAPY has produced an annualised return of 15.67%. This is bettered by only four managed funds – the Discovery Flexible Property Fund, The BJM Multi-Manager Property Fund, the Stanlib Property Income Fund and the Prudential Enhanced Property Tracker Fund.

It’s worth noting that the first three of those are also the best three funds in South Africa overall for the last five years.

For more, visit Moneyweb’s Click-a-unit trust/ETF.

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