Portfolio watch: SA’s top global equity funds

Finding offshore returns.


With South African equity prices looking stretched, many local investors are looking at the potential in other markets. One of the simplest ways to do this is through investing in local rand-denominated unit trusts or exchange-traded funds (ETFs) that invest offshore.

Funds in the Global Equity General category must invest at least 80% of their assets outside of South Africa. They may also not invest more than 80% of the portfolio in any one region.

In general, these funds are biased towards developed markets, particularly the USA, with smaller exposures to emerging markets. Most see their mandate as providing a broad exposure to international equities to give local investors a way to diversify their risk.

Over the last five years, these funds have performed very well as the rand has weakened at the same time as global markets have recovered post the financial crisis. So local investors have seen a double benefit.

The below table shows the top ten funds in this category for the five years to the end of April:

Top performing global equity funds to 30 April 2015
Fund 5 Year annualised total return
Old Mutual Global Equity Fund A 25.66%
Coronation Global Opportunity Equity [ZAR] Feeder Fund A 21.39%
db x-tracker MSCI World Index ETF 21.16%
Allan Gray Orbis Global Equity Feeder Fund 20.69%
Nedgroup Investments Global Equity Feeder Fund A 20.53%
SIS International Growth FoF 20.52%
Discovery Global Equity Feeder Fund 20.41%
Investec Worldwide Equity Feeder Fund R 20.05%
Investment Solutions Global Equity Feeder Fund 19.72%
Oasis International Feeder Fund A 19.48%
MSCI World Index (in rands) 19.08%
Global general equity fund category average 18.30%
FTSE/JSE All Share Index 17.18%
South African general equity fund category average 15.00%

Source: Morningstar

A comparison with the benchmarks shows how well global equity funds have performed relative to the local market over this period. These ten funds have all comfortably out-performed both the All Share Index and the average of the South African general equity fund category.

The Old Mutual Global Equity Fund has been the undisputed champion of this sector over this period. It runs a highly diversified portfolio of over 250 stocks selected on a variety of stock selection strategies.

It’s largest holding is Apple Computers at just 2.3% of the fund. Johnson & Johnson is its second biggest position at 1.2% of the portfolio, and no other stock makes up more than 1% of its assets.

One could argue that this kind of strategy is likely to hedge out any out-performance, since it is difficult for any one stock to influence the fund overall. However, it has clearly worked in the current market cycle.

For a long time the Allan Gray Orbis Global Equity Feeder Fund was in second place on performance tables measuring returns since the financial crisis, but it has relinquished this position over the last year to the Coronation Global Opportunity Equity Feeder Fund and even fallen below the only passive vehicle on the list, the db x-trackers MSCI World World Index ETF.

The fund had a particularly poor year in 2014, due to its high exposure to energy stocks and equities in Russia. It was also underweight stocks in the US, which continued to perform well.

The Coronation fund is invested in a number of underlying funds rather than directly into stocks. It is perhaps the fund in this list most exposed to emerging markets through its position in the Coronation Global Emerging Markets Fund, which is one of its top five holdings.

The db x-trackers MSCI World Index ETF offers the most diversified exposure of any of these funds. It has over 1 600 constituents. It is however still largely concentrated on the US market, with 57% of its portfolio located there.

Taking a longer term view, the below table shows the top performers over the last ten years.

Top performing global equity funds to 30 April 2015
Fund 10 Year annualised total return
Allan Gray Orbis Global Equity Feeder Fund 16.58%
Old Mutual Equity Fund A 15.10%
Coronation Global Opportunity Equity [ZAR] Feeder Fund A 14.63%
Momentum International Equity Feeder Fund A 14.33%
Investec Worldwide Equity Feeder Fund A 14.04%
Investment Solutions Global Equity Feeder Fund 13.36%
Oasis Crescent International Feeder Fund A 13.24%
Investec Global Opportunity Equity FoF A 13.09%
Oasis International Feeder Fund A 12.99%
Nedgroup Investments Global Equity Feeder Fund A 12.75%
MSCI World Index (in rands) 12.06%
Global general equity fund category average 12.25%
FTSE/JSE All Share Index 19.16%
South African general equity fund category average 16.56%

Source: Morningstar

Over this longer period, the first thing to note is that the fortunes of local funds and international funds are reversed, with South African general equity funds easily out-performing their global counterparts. This is quite telling, because this was a stretch that contained periods of both rand strength and rand weakness, as well as both bull and bear markets.

One might infer from this that South African equities are a better long-term investment, and that is reflected in longer periods as well. However, one does need to consider the importance of the starting point when considering what returns are likely to look like going forward.

Whether buying South African equities at their current valuations will be a better long-term investment than buying offshore equities is debatable. Retail investors are therefore probably best off looking at both.

Over the longer period of review, the Allan Gray Orbis Global Equity Fund comes out top in this category. Much of this has to do with how the fund managed the market crash of 2008. It did not fall as far as most of its peers when the bottom dropped out of the market after the financial crisis.

Seven of the funds that appear on this list also appear on the five year table. One exception is the Momentum International Equity Feeder Fund, which is fourth on the list here despite lagging the benchmark over the last five years. This is due to a strong period of out-performance leading up to the 2008 crash.




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