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How local equity unit trusts have performed over the last 10 years

It’s been a struggle.

Investors in South Africa are well aware that the JSE has given meagre returns for the last five years. However, the five years before that were extremely good. The net result is that, over the full 10 years, the JSE has ultimately performed in line with its long-term average.

The annualised return on the FTSE/JSE All Share Index (Alsi) of 13.5% from July 1, 2009 to June 30, 2019 is around 7.5% above inflation. That is exactly what investors have seen from the market over the last 80 years.

Unfortunately, however, this is not necessarily as comforting to local investors as it should be. The reality is that very few of them have actually seen that level of return.

According to figures from Morningstar, only 10 of the 58 local equity funds with 10-year track records have delivered annualised returns of more than 13% since the middle of 2009. Only two managed to outperform the Alsi.

By contrast, 16 funds produced annualised returns of below 10%. The three worst performing South African general equity unit trusts did not even beat inflation over this 10-year window.

The struggle for consistency

If one looks at the performance of equity unit trusts over five years, seven years and 10 years, it is also apparent how difficult it has been for managers to deliver consistent performance.

The table below shows the selection of funds that have outperformed the longest running index tracker over all three periods:

Performance of SA equity general unit trusts to June 30, 2019
Active funds that have consistently outperformed an index tracker
Fund 5-year annualised return 7-year annualised return 10-year annualised return
Fairtree Equity Prescient Fund A1 8.48% 14.05% N/A
Anchor BCI Equity Fund A 7.37% N/A N/A
Aylett Equity Prescient Fund A1 7.1% 11.70% 13.97%
Investec Equity Fund R 6.89% 11.81% 12.96%
Absa Prime Equity Fund A 6.01% 11.81% 13.25%
Sygnia Active Equity Fund A 5.81% N/A N/A
36One BCI Equity Fund A 5.64% 12% N/A
Gryphon All Share Tracker Fund 5.52% 11.18% 13.2%

Source: Morningstar (Note: Not all funds have track records for all periods.)

This illustrates what a challenging environment it has been. Only two of the 58 funds outperformed the index tracker over five years, seven years and 10 years.

The first, obvious point, that this illustrates is how difficult it is for active management generally to deliver consistent outperformance. This is not just true for South Africa. This exercise would deliver similar results around the world.

S&P Down Jones Indices released the latest S&P Persistence Scorecard this month, which measures how many US funds remain in the top 25%, or quartile, of their category over three consecutive 12-month periods. This is not a measurement against an index, but against other funds. To the end of March 2019, this is what it found:

There isn’t a single category of fund in which more than a quarter of managers remain among the top performers over three consecutive 12-month periods. And if this analysis is extended, the consistency of managers deteriorates even further. For instance, not a single large-cap or multi-cap fund remained in the top quartile for every period over five years.

Local idiosyncrasies

While this is informative, the environments in South Africa and the US have been distinctly different. The stock exchange in New York has been marching to regular new highs, while the JSE has remained subdued.

The markets are also constructed quite differently. In South Africa, managers have had to contend with the fact that the JSE has grown increasingly dominated by a single stock. How Naspers performs has come to have an oversized influence on the market as a whole.

Most active funds will limit their exposure to any one company to around 10%, but Naspers is now almost 20% of the Alsi. It has therefore understandably been difficult for active managers to keep up when a stock that large has also gained 1 500% in the past 10 years.

(This is also why many will argue that the Alsi is not a good benchmark. Essentially it is judging active managers against something they can’t replicate. The Alsi’s concentration also makes it less than ideal as a standalone portfolio.)

Where the South African and US markets do align, however, is that over this period growth stocks have massively outperformed value stocks. This is most obvious in the big tech counters like Amazon, Facebook and Tencent, which is what has driven the performance of Naspers.

A market cap weighted index is essentially a growth portfolio, because it increases the weighting to stocks as they get bigger. Value stocks, which are generally those that have fallen, get a lower weighting.

It therefore makes sense that in this environment the index has been a great place to invest.

And since the majority of active managers in South Africa will profess to having some sort of focus on value, it also makes sense that they have underperformed.

Looking ahead

It is however impossible to say whether this will be the case for the next 10 years. Past performance is not an indicator of what will happen in the future. This has been an unusual period on the JSE, and it’s possible that it has presented particular challenges to active managers that won’t be repeated.

This is why the case for building a portfolio that includes both active and passive funds is so strong. The case for low-cost passive exposure has become irrefutable, but investors should still be cautious about putting all their eggs in that basket, particularly in a market as concentrated as the JSE.

A change in market conditions could create an environment in which active managers that build portfolios materially different to the index could deliver excellent returns for their clients. It will also reduce the risks inherent in the index.

However, picking that manager is pretty hard to do, because consistent outperformance is so hard to deliver. Having the security of an investment in the index is therefore always a good place to start.

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Yup, predictions are always difficult, especially about the future.
I always warm to the normal glaringly nonsensical story that one should: ‘Choose a GOOD adviser’…Really? Do you imagine J6P would know who a ‘good adviser’ is if he tripped over one walking out his own front gate?
Do “Good advisers’ walk around with an SABS stamp clearly tattooed on their wrists stating “GOOD Financial Adviser”
The other BS advice: “You’ve got to go for growth”…No kidding pal? Gee now why didn’t I think of that?
These guys, FA’s will do anything other than get themselves meaningfully employed in a measurable occupation.
Incidentally, you will only know if his/her advice actually paid off about 2 weeks before you finally drop off the perch.
Geddouta here!

Good insight!
This confirms my believe that every investor must become its own Active Fund Manager and NOT rely on the so called “experts” to deliver on growth expectations. I am very happy with my cash based fund switching strategy where I patiently wait for opportunities. Inflated and overbought US equities to drag down global equities in the near future. Exciting times for the opportunist!

Now compare the best here to the ZAR return of an SP 500 tracker and then all SA fund managers become redundant!!

Local equity UT’s have performed fair considering the economic circumstances. It goes like this:

Unit Trust asset managers will blame their basket of SA stocks were lacklustre & many large stocks that fell from grace.

The Stocks themselves (if they could talk) will blame it on the poor growth/sales on their respective companies. The board & CEO/CFO’s to blame.

The companies’s CEO/CFO’s will blame their lacklustre target market/general public for reduced sales support, or lack of govt spending/contracts.

The public will say it’s not their fault and argue the reason because they’re not spending as much as before, is due to political uncertainty.

If “political uncertainty” was able to talk, it would blame the ruling party’s rhetoric the past few years about WMC / EWC, and all anti-business / anti-establishment slant of govt.

The ANC will say, it’s not our fault….it’s our leader ZUMA to take the blame.

ZUMA will blame the masses of voters choosing him as president of the ANC.

The majority voters will say, it’s not their fault…..they did not know the economic consequences of poor leaders they choose. They’ll blame poor education system!

The Education system will blame SADTU, the teachers union, for producing substandard teachers.

SADTU will say its not their fault, its the leader of the ANC that had a role in poor leadership choices at Deptartments.

The Govt Departments will blame ZUMA for appointing them. (..again ZUMA! 😉

ZUMA will say it’s the majority of voters’ fault…throwing it back (…or NOW it may be the Zondo Commission to blame for Zuma’s woes?)

All great sentiment. Unfortunately one must note that the electorate doesn’t elect the president, the electorate only elects the ruling party.
So the misdemeanours of the (past) president can, actually, be blamed on the ruling party that appointed him.
Let us not ever lose sight of who (which party) is responsible for this.

Sorry, we’re getting somewhat off the topic.

Sorry that’s all wrong. The blame is with Jan Van Riebeck when he started in 1652 or is it Apartheid once again to blame for all of this. Blaming is to distract from responsibilities. Accountability is the key word here. Fund managers and Government should have a scorecard,roles and responsibilities and accountability. If you score badly and did not perform then no fees and you are dismissed.If there is fraud corruption the watchdogs/auditors are to not doing their job and to be penalised. Bottom line is financial advisors are not performing in a fraud infested corrupt business environment perpetuated by corrupt government.
I invested R113000 3 years ago and its current value R115000 i have zero growth from a well known 30 year old unit trust . Might as well have placed it in CASH investment and managed the taxes and would be a head. Meantime the unit trust took their fees and took the dividends and interest earned on that for themselves. South AFrica today is run with the motto. “STEAL STEAL WHATEVER YOU CAN GET YOUR HANDS ON”. No improvement in value,no innovation, no productivity just steal.

gopieter: A new one to me was when an asset manager on a radio show recently said that ” I always tell my clients to ignore the noise whether from Trump, Brexit, South Africa or where-ever AND STICK TO THE PLAN WHEN THE INVESTMENT WAS MADE!”

The plan, of course, will probably only benefit the manager whilst the client just sits and waits for the noise to go away.

Nonsense advice I think!.

If one looks at the performance of these mentioned funds then there is an argument to have a very ordinary bank FD or a few broad based ETF instead

HoW about stripping out Naspers and the resources shares from these unit trust and then you will see how good a performance has been done by unit trust management.These so call expert get rewarded irrespective if your fund performed or not,

Jayraj, you do know that Resource shares under-performed the JSE by a large margin over the last 7 years don’t you? off course you do…

Nice one Patrick

“These guys, FA’s will do anything other than get themselves meaningfully employed in a measurable occupation.”

Davebee’s comment above opens an interesting door. Measurable occupation means something we see so little of in investment. Maybe it’s time to come up with a useful and objective measurement. Its all very well to invest in the well known names with up to 9 or 10 in an individual portfolio but what is the long term result of the chopping and changing?

An interesting analysis indeed.
I’ve found that sometimes when you go for long term, it doesn’t hurt to try and time the market. An example here is Sasol. Depending on where you bought and sold in the last ten years could result it a small to large gain. Don’t be a silent investor and if you have a manager meet with them as regularly as you do your banker.

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