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.
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.
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.