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SA’s top performing unit trust funds

What to consider before you invest.

JOHANNESBURG – Following the philosophy that investments should be made with a long-term investment horizon, Moneyweb looks at the best, and worst, performing retail unit trust funds over the last ten years to the end of 2011.

Our top performers list, compiled with the aid of independent investment research firm MorningStar SA, separates the super-stars from the dogs in SA’s vast and complex universe unit trust funds.

Although all may be clear in retrospect, an analysis of the factors driving fund performance has revealed a number of interesting insights that those looking to park their money for the next decade may want to consider.

The small companies’ effect

The last decade of unit trust performance may readily be termed “the rise of the small-caps”.

Five of the top 15 best performing funds over the last ten years were those that invest in “smaller companies” – small-mid cap companies (with a market capitalisation of less than R30bn) sitting outside of the JSE Top 40.

This includes Momentum’s Small/Mid-Cap fund, managed by Evan Walker, which topped the list of best performers with its whopping 824.5% return and Nedgroup’s Investment Entrepreneur fund, managed by Anthony Sedgwick, which came in at third with a 686.9% return.

The rise of the small-caps, or, more accurately, the mid-caps, follows a massive loss of investor confidence in the sector following the crash of the Alt-X (Alternative Exchange) listing boom in 2007.

During that period small-cap funds were “extremely over-exposed” to the “extreme valuations” of the 80 to 90 new listings in the small-cap sector, says Walker.

However, since 2007, smaller company funds have brought in new and better management and diversified their core exposures out of the typical small cap listings to the “significantly higher quality” mid-cap listings.

These where “better companies with a better understanding (by analysts) and better management teams… businesses that could make acquisitions and pay dividends”, says Walker.

These mid-caps do, however, still have a capacity for a strong growth which is often absent from the traditional top 40 companies, and it was this growth that drove performance in the sector.

Momentum, for example, shifted its exposure to around 70% mid-caps and around 30% small-caps, being the first to do so, according to Walker. It has benefited from the mix of improved stability and high growth of some the quality mid-caps allowing the fund to outperform both its peers and traditional general equity funds. 

This performance is “specifically about what we call the ‘small-company effect’,” says Warren Ingram, director of Galileo Capital and Financial Planning Institute (FPI) financial planner of the year for 2011. 

“The idea is that investing in small companies as an investment strategy is typically much higher risk than investing in the normal large-caps,” he says.

But with that risk, evidently, comes reward.

Ingram says one reason for the increased growth potential is “that small companies are typically under-researched compared to the top 80 shares in the market… All the main stock brokers will cover the top 80 shares but not all of them will have small-cap analysts”.

This lack of market knowledge allows those that do their research to benefit from a knowledge gap between themselves and the market which provides an increased opportunity to outperform the market.

“The message for the private investor is that if you want to go the unit trust route then having an exposure, maybe 20% to 30% of your equity does make sense… There’s a good chance that you will get some benefit from that exposure.”

Value investing

With the smaller companies sector showing up as the place to have been for the last ten years, the value investment paradigm has shown itself to be the investment philosophy most likely to generate market beating returns in the long-run.

Five out of the 15 top performers (including Allan Gray’s general equity) were funds explicitly dedicated to following the value, as opposed to growth, investment approach.

Included here are Investec’s Value fund, managed John Biccard, which came in second on the list with a return of 767.5% and the Nedgroup Investment Value fund, managed by David Foord, which came in at sixth place with a 575.5% return.

Value investing, notably propagated by the likes of Warren Buffett, is the “strategy of selecting stocks that trade for less than their intrinsic values,” with investors hoping to gain from mismatches in the real value of a share and its market price, according to Investopedia.

“There is quite a big debate in the unit trust industry about value versus growth as an investment philosophy… What this is showing is that there is merit to investing in value as an investment philosophy,” Ingram says.

“Proper value investment as an investment philosophy has a high probability of success over time… Quality value managers have a good chance of outperforming the general equity managers”.

Investors with a long-term investment horizon might do well to select one or more value funds for their portfolio, says Ingram.

Super star fund managers

Well-known “super star” fund managers – John Biccard and David Foord appear on the list. Another is Tim Allsop whose Nedgroup Rainmaker found slotted in at 14th place.

Undoubtedly Walker and Sedgwick are likely to gain some notoriety following their fund’s performance as is Dirk Kotzé, manager of Coronation’s Industrial fund, which came in at fourth on the list as the best performing industrial fund, and a few others. 

“Those are a few of SA’s absolute super-star fund managers and what it shows you is that there is value in choosing an individual fund manager… Some of them, and there’s very few, have the ability to outperform everybody else… These are SA’s version of Warren Buffett,” says Ingram.

Evidently, paying attention to the team responsible for managing your fund can reap reward.

However, “the question for a unit trust investor is do you go and invest in these guys in the hope that they will be around for the next ten years?” Ingram asks. Some of these super-star investors “aren’t young guys anymore” with experience in the industry extending up to 30 years, he adds.

The dogs

Every one of the bottom 25 performing funds over the last ten years has been a “foreign” fund with exposure to assets listed abroad.

Losses have ranged from between -14, 26 and -31.69 % over the ten years for the ten worst performing  foreign funds.

“As the poorest performing funds – which are all funds with offshore exposure – demonstrate, the performance of the SA stock market over the last decade stands in stark contrast to the roughly 0% that American equities have returned to investors over the same period,” says Jeremy Gardiner, director at Investec Asset Management.

This flat performance of the American ,and the poor performance of some of the other foreign markets, has combined with the strong performance of the rand, which has appreciated by around 32.5% against the US dollar, to place foreign funds firmly at the bottom of the list,  according to Tal Nieburg, managing director at Morningstar SA.

However, with recent reversals in the rand’s strength against the dollar “foreign funds have outperformed over the last year…. The foreign funds dominate the top 25 over one year”, says Nieburg. This may well present an opportunity to invest in the foreign funds.

“Ideally, when it comes to investments, you want to buy when prices are low rather than high” says Gardiner.

“The trick is trying to ascertain how much bad news is already in the price and how much is still to come. If the news is unlikely to get much worse, it is probably the time to invest …

“It is for these reasons that investors should not avoid developed market equities or their currencies indefinitely. There is an enormous amount of bad news already priced into developed market equities,” he says.


“The chances are that the higher cost funds will typically perform quite a lot worse than their competitors,” Ingram says. “What we’ve found through international research is that the lowest-cost funds in any sector are typically in the top 50% of performers over a long period of time.”

Fund costs are reflected in the total expense ratio (TER) which is the industry term for administrative and other costs associated with having your money in a fund. TER’s range from around 1% to upwards of 3% of your net investment, charged annually.

Typically the extra costs aren’t justified by a higher return: “They might be over a one to three year period but when you start getting into the five to ten year period, to consistently achieve that level of outperformance is nearly impossible,” says Ingram.

“If you are a private investor start with what’s the cost of the fund compared to its peers. If the fund is low cost that’s a major tick in your favour… If your fund is very expensive and it’s underperforming that’s a very big warning sign to get out of your fund,” he says.

Buy equity and stick

One notable trend in the best performing funds is that, despite the global financial crises, they are all equity funds.

“One clear message here is if you look at the top performers there isn’t a single money market fund that’s in the top performers over the last ten years.

“People who are tempted to constantly buy money market funds instead of looking at any kind of exposure to shares are hurting themselves enormously,” says Ingram

While making sure to have exposure in equity, investors are also advised not to chop-and-change their fund to frequently.

“If you simply held your unit trusts for five years or longer you will do far better than most unit trust investors will do simply because you held, not for any other reason,” says Ingram.

“The one message is that dividends account for about 50% of your equity growth over time and the only way you can earn the dividends is if you stuck it out, if you actually remain invested,” he says.

Fund  Total Return (10 YR) % ** Average Annual Return  Real Return (less inflation) TER  Rank ASISA Sector 
TOP 15 Performing Unit Trust Funds (10 years to 31/12/2011)
Momentum Small/Mid-Cap A 824.54 24.90867 19.01362 1.72000 1 Domestic EQ Smaller Companies
Investec Value R 767.56 24.11660 18.22155 1.17000 2 Domestic EQ Value
Nedgroup Inv Entrepreneur R 686.94 22.91196 17.01691 1.18000 3 Domestic EQ Smaller Companies
Coronation Industrial 613.44 21.71273 15.81768 1.20000 4 Domestic EQ Industrial
Old Mutual Industrial A 575.46 21.04866 15.15361 1.44000 5 Domestic EQ Industrial
Nedgroup Inv Value R 575.45 21.04842 15.15337 1.14000 6 Domestic EQ Value
Coronation Property Equity 557.42 20.72135 14.82630 1.41000 7 Domestic RE General
Allan Gray Equity A 557.2 20.71729 14.82224 1.56000 8 Domestic EQ General
STANLIB Industrial R 554.17 20.66153 14.76648 1.14000 9 Domestic EQ Industrial
SIM Value R 546.31 20.51591 14.62086 1.73000 10 Domestic EQ Value
SIM Small Cap R 539.86 20.32592 14.43087 1.18000 11 Domestic EQ Smaller Companies
Investec Emerging Companies R 536.2 20.24700 14.35195 1.43000 12 Domestic EQ Smaller Companies
Momentum Value A 532.04 20.23871 14.34366 1.72000 13 Domestic EQ Value
Nedgroup Inv Rainmaker A 531.6 19.69955 13.80450 1.15000 14 Domestic EQ General
Old Mutual Small Companies R 503.84 19.38881 13.49376 1.84000 15 Domestic EQ Smaller Companies
Bottom 10 Performing Units Trust Funds 
Prudential Global Value FoF -14.26 -1.52647 -7.42152 2.75000 205 Foreign EQ General
STANLIB Global Equity FF A -14.56 -1.56151 -7.45656 2.18000 206 Foreign EQ General
STANLIB MM Global Equity FF A -18.21 -1.99027 -7.88532 2.67000 207 Foreign EQ General
Momentum Global -19.03 -2.09003 -7.98508 2.08000 208 Foreign EQ General
STANLIB USD Cash FoF A -21.74 -2.42194 -8.31699 0.74000 209 Foreign FI Varied Specialist
Sanlam Global Equity R -23.37 -2.62633 -8.52138 1.36000 210 Foreign EQ General
Sanlam International Equity FoF A -24.41 -2.76029 -8.65534 2.03000 211 Foreign EQ General
ABSA International R -25.65 -2.92076 -8.81581 1.14000 212 Foreign EQ General
Old Mutual Global Technology -28.6 -3.31217 -9.20722 2.44000 213 Wwide EQ Technology
Sanlam Pan-Europe -31.69 -3.73888 -9.63393 2.37000 214 Foreign EQ Varied Specialist
Average * 236.28%
* based on the complete sample of 214 funds 
** Total return less TER 


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