When the Satrix Divi launched in 2007 it was met with a great deal of interest. It was the first smart beta product launched in the South African exchange-traded fund (ETF) market and investors were drawn to the idea of a high-yielding equity fund.
The ETF tracks the FTSE/JSE Dividend+ Index, which selects the 30 stocks on the market with the highest one-year forecast dividend yield. Their weighting in the index is based on this forecast yield, rather than their market capitalisation.
Initially, the fund did extremely well. Most significantly, it was one of the best-performing local funds in the 2008 market crash. In a year where the All Share Index fell 23.2%, the Dividend+ Index was only 6.9% down.
Four more years of outperformance followed. Even as the market recovered strongly from the global financial crisis in 2009 and 2010, the Dividend+ Index outshone the All Share.
While the strength of this early performance was obviously great for investors, it also had an unexpected consequence. The Satrix Divi had done so well, that many investors believed that this was a fund that would always deliver market-beating returns, and many people bought into the fund on the strength of this performance alone.
What happened next, however, was a significant reversal. For 2013 and 2014, the performance of the Dividend+ Index slowed dramatically. Then in 2015, the fund lost nearly 20% in a year when the All Share was up 5.1%.
Suddenly a number of questions were asked about the suitability of this strategy and whether choosing stocks purely on their forecast dividend yield was really such a good idea. Since the index didn’t take the quality of company earnings into account, it became quite obvious that this was a strategy that could deliver extremely varied results.
Inevitably, this decline in fortunes led many investors to sell out of the fund and put their money elsewhere. Some even argued that the dividend strategy was broken.
However, the last two years have seen the Dividend+ Index rise again. In 2016 the index jumped 24.7% when the All Share was up just 2.6%, and in 2017 it gained another 27.3%. The Satrix Divi is now the best-performing local ETF over the last two years, and over ten years its return is once again higher than the All Share Index.
The table below illustrates the relative performance of these two indices over the last 10 years.
|Ten year index performance|
Source: FTSE Russel
What this also shows is that over the last five years the Dividend+ Index has been significantly more volatile than the All Share. Over this period, it shows a standard deviation of 13.9%, compared to 10.8% for the market as a whole.
Having been through a cycle, investors in the Satrix Divi should now appreciate why.
This is essentially a value fund. That means it will have periods of extremely sharp underperformance, but equally it will deliver spikes of outperformance. The 2015-2016 period is a perfect illustration of this.
What good value strategies also deliver, however, is downside protection. As in 2008, value funds will not be as hard hit when markets crash. Over the last ten years the Dividend+ Index has seen a maximum drawdown of 32.4%. For the All Share Index, that figure is 45.4%.
Over the full ten years, the Dividend+ therefore has a better return/risk ratio than the All Share, despite its recent volatility. This indicates that, as with all good value strategies, if investors are able to sit out the weak periods, there should be long-term rewards.
The Dividend+ Index also clearly offers diversification benefits as its performance differs quite a lot from the All Share and the Top 40. Over five years, the correlation between the Divdend+ and the Top40 is just 0.54%.
Significantly, the Dividend+ Index has also delivered on its primary objective – which is to deliver dividend yield. Over the last five years, its yield has remained significantly above that of the All Share.
Is now the time to invest?
After two such good years, it’s now likely that the Satrix Divi will once again attract investors chasing performance. However, technical analysis by Peet Serfontein of Phoenix Investment Analytics shows the shortcomings in this approach.
As the chart below shows, having gained over 30% in the last six months, the Satrix Divi is now trading more than two standard deviations above its “fair price”.
“In summary, this suggests a potential 13% correction,” says Serfontein.
For the moment the trend remains bullish, but there’s a good chance that the performance from the Satrix Divi may taper off again. In other words, volatility will remain.
This also suggests that investors buying into the Satrix Divi might once again be doing so at the wrong point in the cycle. The time to buy a fund like this is not after it’s done really well, but rather when it’s just suffered a really poor period. In reality, however, very few investors have the conviction for that.