It is rare that markets deliver two months back-to-back like they did in March and April. The FTSE/JSE All Share Index (Alsi) dropped 13.3% in March and then raced up 14.0% in April.
Ultimately, over this two month period, the index was down just 1.1%. In other words, it almost got back to where it started.
This sharp V-shaped event allows an extraordinary opportunity to analyse an important investment question – is it more important to minimise losses when markets are falling, or to out-perform when they are going up?
It also provides the chance to see how many managers are able to do both.
To do this, Citywire analysed the returns of the 176 funds in the Morningstar South Africa and Namibia Equity category over this two month period. We broke the universe into performance quintiles for March, April, and then March and April combined.
A lonely survivor
The first finding is that consistency over the two months was highly elusive. Only one fund appears in the top quintile for both March and April. That is the APS Ci Equity fund of funds.
As the graph below shows, the best predictor for which funds would perform in April was actually how poorly they had done in March. Nearly 75% of the top performs in April came from the bottom two quintiles the month before.
Most notably, the top five performers in April, were all bottom quintile performers in March.
To some extent, the reverse holds true as well. As the graph below shows, the majority of funds that were bottom quintile performers in April were in the top two quintiles in March.
There were however six funds that were in the bottom quintile for both months.
What is particularly noteworthy is that the two top-performing funds in March, were the second and third worst performers in April. The IFM Technical fund was down just -0.3% in March, and gained only 1.8% the following month. The Sanlam Stable Growth fund lost -2.1% in March, and was up just 2.0% in April.
The overall picture
From this comparison, there is therefore little indication of whether the March or April returns of these funds was ultimately more important. That only becomes clear when the returns over both months are combined. Then an extreme distinction emerges.
The top performers are dominated by those funds that did best in March. Of the top quintile of performers for the two-month period, 94.3% were in the top two quintiles for March, and 74.3% of them were in the top quintile for that month.
There is, however, almost no relationship between how funds performed in April and how they did over the two-moth period. As the graph below shows, there is an almost equal representation of funds across the April performance quintiles.
The obvious conclusion is that when looking at the top funds over these two months, how they performed in the recovery period was far less important than how well they protected capital in the crash.
Making this point even more strongly is the fact that every fund that was a top quintile performer in March ended up in at least the top two quintiles when March and April are combined. Even though 37.1% of them were in the bottom quintile for April, they all still out-performed the average fund over the two-month period.
There is also only one fund that was a bottom quintile performer in March that made it into the top quintile for when the months are combined. However, 63% of the bottom quintile performers in March appear in the same quintile again when March and April are taken together.
While this is an extremely short-term analysis, the conclusion is nevertheless clear: the managers who are able to minimise losses in the bad times are more valuable than those who out-perform in the good times.
Top general equity funds for March 1 to April 30 2020
|March return||April return||March-April return|
|36ONE BCI Equity fund A||-7.05||15.09||6.97|
|African Alliance Equity Prescient fund A1||-7.47||15.30||6.68|
|Stonehage Fleming SCI Equity fund A1||-3.39||9.86||6.13|
|Methodical Equity Prescient fund A1||-7.88||14.39||5.37|
|Kagiso Top 40 Tracker fund||-8.26||14.56||5.09|
|Sasfin BCI Equity fund A||-7.14||12.75||4.70|
|APS Ci Equity FoF A||-10.33||16.53||4.49|
|Cratos BCI Equity fund A||-8.52||13.65||3.96|
|Kruger Ci Equity fund A||-10.74||16.10||3.63|
|1nvest Sector Neutral Momentum Index fund A||-14.21||20.22||3.13|
|Sanlam Select Focused Equity fund B3||-6.36||10.11||3.11|
|Sygnia Active Equity fund A||-18.93||27.17||3.10|
|1nvest ALSI 40 fund A||-10.17||14.74||3.07|
|GTC Equity fund A||-8.95||13.07||2.95|
|1nvest Sector Neutral Growth & Quality Index fund A||-6.77||10.27||2.81|
Patrick Cairns is South Africa editor at Citywire, which provides insight and information for professional investors globally
This article was first published on Citywire, here.