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%|
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.