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Only 19 local equity funds have beaten inflation over five years

Dividend funds show particular resilience.

The last five years have been a tough journey for investors in the South African stock market. This is clearly illustrated by the returns from local equity funds to the end of May this year.

Of the 102 unit trusts and exchange-traded funds (ETFs) categorised as South African general equity funds, only 19 delivered annualised returns above inflation for the five years between June 1, 2014 and May 31, 2019:

SA Equity General fund performance
Fund Five-year annualised return
Anchor BCI Equity Fund A 7.57%
Fairtree Equity Prescient FundA1 7.54%
Satrix Momentum Index Fund A1 7.34%
Aylett Equity Prescient Fund A1 7.01%
Investec Equity Fund R 6.58%
Satrix Divi Plus ETF 6.5%
Sygnia Divi Index Fund A 6.22%
Satrix Dividend Plus Index Fund A1 6.03%
36One BCI Equity Fund A 5.82%
CoreShares S&P SA Dividend Aristocrats ETF 5.79%
Marriott Dividend Growth Fund R 5.54%
ClucasGray Equity Prescient Fund A1 5.52%
Prime General Equity Fund B 5.51%
Absa Prime Equity Fund A 5.49%
Laurium Equity Prescient Fund A1 5.31%
Gryphon All Share Tracker Fund 5.31%
Rezco Equity Fund A 5.15%
Prudential Equity Fund A 5.05%
Truffle SCI General Equity Fund A 5.04%
SA CPI (Headline) 5.01%
FTSE/JSE All Share Index (total return) 5.44%

Source: Morningstar

A number of things stand out from this list.

An active battle

The first is that only the top 14 funds outperformed the FTSE/JSE All Share Index (Alsi). Only one more produced a return better than the top-performing general index tracker – the Gryphon All Share Tracker Fund.

In other words, 86.3% of funds failed to beat the market over this period.

While the extra 2% per year generated by the top funds is certainly meaningful in a low return environment, it’s worth noting that it is still below the 8.3% one could have earned from bonds. It is barely above the 7.4% available from cash.

This is obviously a concern for investors who have been told that investing in equities is meant to be the best long-term hedge against inflation. Stocks are supposed to produce the highest real returns of any asset class, representing the best way to not only protect but also meaningfully grow your wealth.

Over the last five years, this has been turned on its head. Cash and bonds, usually defensive assets, have done more for investors over this period than stocks.

This is why bond funds and multi-asset income funds have seen increased inflows in recent years. Investors have found their short-term performance more appealing.

However, there are long-term risks in that approach. Consider that over the last 10 years, local equities have outperformed local bonds by around 5.5% per annum. That long-term number is probably far more meaningful, and shows why investors should be cautious about abandoning local stocks.

Bigger is not better

The second point worth noting is the predominance of funds run by smaller managers. The Investec Equity Fund is the only unit trust from one of the big asset managers to appear on the list.

This suggests that managers with more ability to seek out opportunities in the mid- and small-cap sectors have enjoyed a higher chance of delivering returns to clients. Due to their size, larger asset managers are more restricted to investing in the large cap stocks in the Top 40.

This might sound counterintuitive, since Naspers has come to dominate the JSE to such an extent. The media giant’s share price is up around 185% over the last five years, and given that it is now more than 20% of the index, one might assume that the simple secret to earnings returns over this period was to have a good chunk of Naspers in your portfolio.

Some of the top performers, however, own no Naspers at all.

The Aylett Equity Prescient Fund, the Satrix Divi Plus ETF, the Sygnia Divi Index Fund, the Satrix Dividend Plus Index Fund, and the Marriott Dividend Growth Fund all have no exposure to the counter.

A significant consequence of this underperformance by large managers is that a meaningful majority of local investors would have not seen above-inflation returns over this period. According to the latest statistics from the Association for Savings and Investment South Africa (Asisa), the 19 funds on this list represent just 10.5% of all the assets invested in local equity funds.

This means that nearly 90% of investors in local equity funds have seen both below-market and below-inflation returns over the last five years.

You can’t ignore dividends

The final point to consider is that of the 17 funds on this list, five have a specific dividend focus. These are the Marriott Dividend Growth Fund and the four dividend index trackers managed by Satrix, Sygnia and CoreShares.

At the end of May, the dividend yield on the Alsi was 3.54%. That is a substantial chunk of the 5.44% total annual return from the index over this five-year period.

The dividend yield from the Satrix Divi ETF was 4.04% at the end of May. The CoreShares S&P South Africa Dividend Aristocrats ETF is showing a historic yield of 4.45%.

These funds actually follow significantly different strategies – the Satrix Divi is targeted towards value, while the CoreShares product has a quality bias. Yet, when share prices are so subdued, the extra dividend income that both of them produce has made a significant difference.

This is particularly noteworthy because during the global financial crisis, it was also dividend funds that held up best among local equity funds. It certainly appears that dividends have allowed the total returns of these funds to be more resilient in difficult environments. That is an important reminder of how important dividends can be.

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Remarkable that there still remains an active vs passive debate in general equities – whether in South Africa or elsewhere. It is impossible to tell in advance which active fund managers will still be standing in 5 years time – never mind which will outperform an associated index.

Use well known index funds such as vanguard for your global: share, listed property and infrastructure asset allocation and perhaps an active manager in small company exposures – where there appears to be an information shortfall enabling opportunities to identify mis-priced assets.

When investing emerging markets, go active, and ignore Russia Turkey, Brazil and South Africa. Go Asia only. Have a look at the Fidelity Asia Fund.

As if inflation was really that low, given the rise of food, fuel, electricity and medical prices over that period.

Who were the bottom 5 and how bad were they? Morningstar seems like it has been paywalled

Dovish monetary policy in developed markets, in effect, turns South Africa into a deflation magnet. We attract deflation and a shrinking economy from across the globe. The search for yield by international investors will force them to ignore the dire state of our economy, our bankrupt SOE’s, huge government guarantees and corrupt government. Our high interest-rate environment is a poisoned chalice for local enterprise. The local industries pay a high cost for capital, plus the stronger exchange rate creates an uncompetitive environment for local manufacturers.

When they lower their interest rates, the developed markets are in fact exporting their deflation, lower profitability, the shrinking tax base and bankruptcies to South Africa. We are in a catch-22. A terribly inept and corrupt government forces the yield on government bonds higher, causing us to lose the international currency war. Competitive Devaluation, that is how developed markets are trying to remain competitive.

The factional skirmishes in Luthuli House are the reasons why we are losing the international economic battle. These myopic and ignorant socialist looters in Luthuli House are guilty of treason. It is so bad that only a downgrade from Moody’s can “save” us now. A downgrade will weaken the rand and improve the margins for local primary industries(temporarily). Local entrepreneurs are getting choked by both our own government and by international Reserve Bank action.

Wonder how it would compare with very cheap locally held foreign ETF’s? Would be a nice comparison.

Vanguard US Total Market Shares Index Fund would have delivered 17.5% per annum net of fund manager fees over 5 years. Don’t expect it to do the same in the next 5 years.

I think that real inflation is higher than what is stated and therefore there are less that have beaten inflation.

My grocery bills grew by 18.7% between Jan 2018 and Jan 2019

Exactly. My dedicated grocery credit card indicates a 16.1% increase. Forget Stats SA.

You don’t eat enough beef.
Beef prices dropped 10% between Jan18 – Jan 19
Source Red meat producers organisation website.

You guys paid for the new P and P CEO’s R50 bar……

Interesting figures but all the warning signs were there. I followed MH advice a long time ago and moved offshore best possible and have never looked back. Diversification where possible is the answer. There are a number of offshore Feeder funds both in local currency and US$ that are available. Example both Satrix World ETF 11.76% and Investec Global Franchise funds 14.09% ( as per Morningstar 16 June in Sunday Times over 5 years ) beats these returns and there are a number of others as well.

At least we can take solace knowing that all the fund houses and their guru fund managers still got handsomely paid for a job well done. Throw in the JSE, stockbrokers, indispensable financial advisors and lets not forget the taxman and suddenly i feel alot better. Muppet’s indeed.

There is a growing problem since the subprime mortgage crisis, Fund Managers are just careless. We are in an age where people must manage their own savings including Pension/Provident funds. When I began investing my own money I tried to reason how Fund Managers were doing it & realized I was going to fry my trading account. I went & studied markets on my own using prior knowledge, my strategy runs counter to Fund Managers’ most of the time. My portfolio is up 14.6% in just under 8 months of my first year of active trading. If I take advice from Fund Managers I’d be worse off. If you see the emotion that goes into the markets on a daily basis and realize 90% is Fund Managers you’ll get my point. At the end of the day it is not about being a CFA if your emotions are worse than a Grade 7 student. One day the world will wake up.

Hi Patrick, Why have you used 5 years and 1 month? Or did you mean to say 31 May 2014?

That was a typo! Thanks for picking it up. It should be 1 June 2014.

While you are making some valid points, Patrick, the reality is also that timing is crucial when you do calculations like this. I just took one of the equity funds in which a part of my own retirement capital is invested and did some back-checking. The fund is not one of those on your list, i.e. it did not beat inflation over 5 years to end of May 2019. The results are quite revealing. Looking back five years on a month-by-month basis over the last 12 months, however, the fund did beat inflation in 11 of the 12 months by 1.79% p.a. at the worst and by 6.98% p.a. in the best month. In May it underperformed inflation by 0.42% p.a. If I look at the monthly performance graph of the fund (my own real numbers, not performance figures supplied by the fund)the highest point was in August 2018 and the lowest in May. While there is a general downward trend since August 2018, the real story is one of extreme volatility in the markets. Some of the daily and weekly movements this year would have been termed a correction 15 years ago. So what to make of it? In times of uncertainty, stick to the basics. Any chance of real growth in wealth in the long term remains in equities. Bonds and cash are good for stability and temporary parking bays but cannot generate substantial wealth over the long term. So, it’s getting asset allocation right and having the sense to ride out the storms.

Hindsight articles are always easy. You take the poorest performing asset class & region, and compare that with cash or inflation.

For sure, say IF the ZAR strengthened over the past 5 yrs, then most global funds would’ve had dismal rand-performance, and so forth.

Let me ask the writer: kindly write an article giving a “foresight” view for the NEXT FIVE years, i.e. what asset class (and region) will outperform the other(s), and I will be more interested.

What about the best risk adjusted returns? Which of the top performers has the lowest correlation with the market? These are things that are useful beyond just a total return number.

Coreshares Divtrax dividend yield is 2.55% (after DWT), not any near 4.45%.

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