The last few days have seen some of the most extreme market volatility in decades. From levels of over 57 000 at the start of 2020, the FTSE/JSE All Share Index (Alsi) has fallen to below 40 000.
On Thursday last week the market was in the extraordinary position that every share in the index was in negative territory.
At the same time, South African 10-year government bond yields have spiked from 8.25% at the start of the year to above 10.5%. As yields go up, bond prices fall, which means that investors in these assets have seen the value of their holdings decline.
Funds tracking the JSE All Bond Composite Index are down over 4.5% in the last month alone.
This is an incredibly difficult environment in which to manage money. Local fund managers have had nowhere to hide, apart from the safety of cash if they had the ability and conviction to move out of the markets.
Just how challenging this period has been is illustrated by the performance of multi-asset flexible funds since the start of the year. These unit trusts have the ability to invest across asset classes, without any restrictions. Portfolio managers are therefore allowed to move into whichever investments they deem most appropriate at any given time.
Up until the end of last week, only five of the 93 funds in this category had posted positive returns for the year to date. The majority of flexible funds were down more than 10%.
Over a one-year period, the figures were not much better. Only eight funds in this category were up over the previous 12 months.
The managers who have been able to protect capital over this period have obviously provided their clients with a great deal of comfort. When the Alsi is down 22.6% in less than three months, investors can feel pretty good about being in a unit trust that has given a positive return.
Critically, this is likely to give them the confidence to remain invested. Selling out at times like these and realising losses can destroy significant wealth over the longer term.
These managers have also made things much easier for themselves when the market turns. Funds that have lost 15% or 20% first have to make that back before they even start recording gains. Those that limited their losses are starting the recovery at a significant advantage.
Good managers, bad managers
However, investors should be careful about extrapolating from this that all the managers that delivered positive returns over this period must be good, and those that lost the most must be bad. Although this has been an extreme event, it is also a short-term one.
Investors should be far more concerned about what their fund manager is able to deliver over much longer time periods. It is therefore highly instructive to look at the top-performing South African flexible funds over the last 10 years, and compare this to their performance for the year to date.
|Performance of SA multi-asset flexible funds|
|Fund||10 year annualised return||Return year-to-date|
|Centaur BCI Flexible Fund A||12.91%||-14.67%|
|36ONE BCI Flexible Opportunity Fund A1||11.94%||-3.58%|
|BlueAlpha BCI All Seasons Fund A||10.72%||-6.51%|
|Autus Prime Opportunity Fund A||10.17%||-8.23%|
|Long Beach Flexible Prescient Fund A1||10.11%||-14.52%|
|Montrose BCI Flexible FoF||9.77%||-12.84%|
|Visio BCI Actinio Fund A||9.16%||-17.20%|
|Noble PP Stanlib Flexible Fund A||8.11%||0.72%|
|PSG Flexible Fund A||8.07%||-22.64%|
There are two striking things about this table. The first is that of the nine best-performing funds over the past decade, only one has a produced a positive return this year.
So while delivering this kind of protection for investors is commendable, it is hardly a guarantee of long term success.
Secondly, some of the funds on this list have experienced significant declines since the start of 2020. Most obviously, the PSG Flexible Fund is one of only five funds to have fallen more than 20% this year.
Yet its long term record is still among the best in its category. Its recent short-term performance is therefore not an indicator of its long-term track record.
The really long term
In fact, it is quite instructive if you compare the performance of the PSG Flexible Fund and the Noble PP Stanlib Flexible Fund from as far back as August 2008. As the graph below shows, their trajectories have been quite different.
The PSG Flexible Fund has always been mostly invested in equities. It therefore underperformed the Noble PP Stanlib Flexible Fund during the 2008 crash as well, but substantially outperformed in the decade that followed.
The PP Stanlib Flexible Fund, on the other hand, has always invested predominantly in cash and bonds. Its return has always been far more stable and linear. It is therefore really no surprise that it has outperformed this year.
This highlights how important it is for investors to look beyond just short-term numbers.
It is critical to understand what you are buying, and how you should expect it to perform over the long term. It is also vital to appreciate that short-term returns are not a predictor of long-term success or failure.