It is a testament to how difficult the investment environment was last year that the two top-performing South African unit trusts in 2018 were US money market funds. At the moment, the yield on the US money market is a little over 2%, which is hardly an investor’s dream.
The bulk of the return from these funds was therefore due to the weakening of the rand. The local currency lost close to 14% against the dollar last year, which benefited investors who held assets in foreign currency.
However, given that the rand had rallied from R13.88 to the dollar at the beginning of December 2017 to close to R11.50 towards the end of February last year, even this is not a scenario that a lot of people would have expected. At the start of 2018, there was a fair amount of optimism that the rand would be able to hold onto its gains, but that failed to materialise in the face of a strong dollar.
This is a good illustration of how difficult it is to predict asset class returns in the short term. What may seem like a clear trend can reverse incredibly quickly.
Returns were hard to find
It is unlikely that many people would have predicted that holding US dollars in cash would have been the best place to have your money last year. However, global asset classes ended the year so poorly that there was very little return to be found anywhere else over the past 12 months.
The one exception was local preference shares, which rallied in 2018. As the table below shows, the majority of the top 10 performing funds were focused on international fixed income assets.
|Top performing unit trusts of 2018|
|Alexander Forbes USD Feeder Fund||18.38%|
|Stanlib USD Currency FoF A||17.72%|
|Bridge Diversified Preference Share Fund||17.09%|
|Absa US Dollar Income Fund A||16.87%|
|Investec Global Multi-Asset Income Feeder Fund A||16.49%|
|Marriott Global Income Fund||16.36%|
|Coronation Global Strategic USD Income [ZAR] Feeder Fund A||16.04%|
|Absa Global Multi-Asset Feeder Fund A||15.69%|
|MI-PLAN IP Global Macro Fund B5||13.66%|
|Nedgroup Investments Global Cautious Feeder Fund A||13.51%|
These are not typically the kinds of funds one holds in anticipation of top performance. They are conservative options that one rather expects to deliver stable type returns.
It is therefore unlikely that these are the funds that will once again top performance tables in 2019. Even if local and international equity markets experience another bad year, which is not impossible, few analysts expect the rand to weaken substantially over the next 12 months. Without that currency impact, investors are not going to see much yield from international fixed income.
Besides the Bridge Diversified Preference Share Fund, the other notable fund on this list is the MI-PLAN IP Global Macro Fund. This is a global flexible fund that would normally be primarily invested in international equities. However, by November last year it had more than 70% of its portfolio in cash.
This weakness in asset class performance across the board had a serious impact on local balanced funds. The average South African multi-asset high equity fund returned -3.7% in 2018. Only 19 of the 186 unit trusts in this category delivered positive performance.
South African low equity funds fared only slightly better. The average return in this category was a meagre 1.26%.
As these are the most popular investment vehicles in South Africa, the majority of local investors would have had a disappointing year. It may not be much consolation, but it’s worth appreciating that everyone was in much the same boat. When markets perform like they did last year, there aren’t many reasonable alternatives.
You might think that having the bulk of your money in the US money market was a great idea over the last 12 months, but it’s unlikely to be a successful long-term strategy. Markets work in cycles, and inevitably things will turn. If you’re still sitting in cash when that happens, you will miss out, and the gains you forego are likely to be much larger than any you picked up in 2018.
Bottom of the pile
The one asset class that had a particularly poor year was local listed property. As the table below shows, all 10 of the worst-performing unit trusts in South Africa last year were property funds.
|Worst performing unit trusts of 2018|
|Absa Smart Alpha Property Fund A||-31.16%|
|Absa Property Equity Fund A||-30.82%|
|Metope Property Prescient Fund A||-29.22%|
|Ashburton Property Fund A||-28.97%|
|Ci Property Fund B||-27.98%|
|Stanlib Property Income Fund B1||-27.87%|
|Ashburton Property Tracker Fund A||-25.88%|
|Warwick BCI Property Fund B||-25.88%|
|Momentum Real Growth Property Index Fund A||-25.86%|
|Sygnia Listed Property Index Fund A||-25.73%|
It is worth noting that both the Absa Property Equity Fund and the Metope Property Prescient Fund were among the top 15 performing unit trusts in 2017. They have therefore experienced a complete reversal in fortunes.
Up until the end of 2017, property funds were also comprehensively the best long-term performers. Over the previous 10 years, 13 of the top 20 performing funds were South African property unit trusts.
This is as clear a reminder as any that past performance is no guarantee of future returns, particularly over the short term. Investors should never expect an asset class or fund to continue to appreciate indefinitely.
That doesn’t mean to say that 2019 will continue to be bad for listed property, or that this correction has now created a definite opportunity. Those are short term predictions that are hazardous to make.
What is more relevant is choosing funds that suit your long-term investment objectives and that you will be comfortable holding no matter how they perform from year to year. That is the only way to guarantee investment success.