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Three lessons for investors from the past five years

Comparing the performance of equity and balanced unit trusts.
Periods of outperformance can be due to a fund’s ability to keep producing decent returns when the market is going backwards. Image: Shutterstock

Over the past five years, investors on the JSE have struggled to earn inflation-beating returns. The FTSE/JSE Capped Shareholder Weighted All-Share Index (Swix) has delivered just 3.09% per annum over this period.

The encouraging thing is that the average South African general equity unit trust has fared slightly better than that. The median annual return of funds in this category has been 3.41%, and mean average return is 3.13%

Those who have invested in balanced funds have done even better. The median return from the South African multi-asset high equity category is 4.84%, and the mean average return is 5.05%.

There is, however, a fairly wide dispersion among these funds. As the table below shows, the spread of returns between the best and worst performing unit trusts over this period is quite large.

Best and worst performing unit trusts over five years
Category Best Worst Differential
SA equity general 9.65% -3.04% 12.69%
SA multi-asset high equity 11.05% -0.05% 11.10%

Source: Morningstar

Compounded over a five-year period, this is a meaningful variance. The table below shows the difference in final value that would have been realised from investing R100 000 in either the top or bottom performers.

Illustrative returns of R100 000 invested over five years
Category Best Worst Differential
SA equity general R162 000 R85 898 R76 102
SA multi-asset high equity R173 744 R99 750 R73 994

Lessons for investors

These figures reveal a number of important considerations for investors. The first is how much better multi-asset funds have held up over this period than pure equity unit trusts.

The returns from balanced funds are still not enormously exciting, but they have at least, on average, kept up with inflation. Most investors in these products have therefore not lost value over this period, which they would have done in most pure equity funds.

The reason for this is that balanced funds are able to build portfolios from a range of asset classes.

Even though they are mostly exposed to the local stock market, their ability to invest in South African bonds and cash, as well as a range of international assets, means that when the JSE is underperforming, they can still generate returns elsewhere.

Over the long-term, this means that one should expect them to slightly underperform pure equity funds, as the stock market has the highest potential for growth. However, over shorter periods they are able to offer investors a much higher level of comfort.

Seeking stability

It is also worth noting how the returns from local equity funds have been far more volatile than those of multi-asset high equity funds. This is illustrated in the two charts below tracking the five-year performance of the three best performing funds in each category.

South African equity general funds

Source: Morningstar

Source: Morningstar

South African multi-asset high equity funds

Source: Morningstar

It is clear how the balanced funds have climbed in a far more steady pattern over this period than the equity unit trusts. The Investec Value Fund, in particular, has vacillated between periods of massive outperformance and significant underperformance.

Over the longer time frames, this type of return profile can deliver outstanding returns. It can, however, be difficult for the average investor to sit through it from year to year.

This is a further benefit of diversification. Including a range of asset classes in a portfolio smooths out returns, because when one part of the portfolio isn’t performing, there should be another part that lifts it.

Longer-term returns can still be a result of short-term performance

One of the most often heard pieces of advice is that investors need to be patient and think long term. This is not just because it is only when you start compounding returns that they really become meaningful. It is also because markets do not deliver performance in a straight line.

Even though the multi-asset high equity funds shown above have been relatively consistent, there was a point not that long ago at which none of them were showing meaningful outperformance. By the end of February 2018, the three-year return for all of these funds was only marginally above that of the Capped Swix.

Since that start of March last year, however, they have meaningfully outperformed. This is shown in the graph below.

Source: Morningstar

Their long-term outperformance is mostly due to the returns generated over this reasonably short period. No investor could have predicted this ahead of time. The only way to have benefitted from it would have been to have stayed invested over the full time, even though the previous three years had not been particularly fruitful.

It’s also worth considering that this recent period of outperformance has not been due to these funds delivering spectacularly high returns. It is mostly because they have been able to continue producing decent returns at a time when the market has gone backwards.

This shows that investing is not just about chasing high returns. It is often about the basic principles of prudent asset allocation, protecting capital and staying invested.

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The 4th and only lesson was that 100% of your discretionary money should have been offshore.

Good point Magnus. What’s happened to the Brenthurst Global Balanced Fund though? I see the fund has under performed its Benchmark by 1.3% over the last 5 years and only returned +/- 8.6% p.a in Rands.

So you could have actually done better in some local funds compared your Offshore Balanced Fund.

Why don’t you mention the Brenthurst Global Equity fund? Up 22% in USD terms YTD to 10% year on year. Cheap, low-cost ETF fund.

I find it unbelievable that many articles are written about the poor performance of the South African economy. However, how does anyone expect it to grow when reporters/ advisors are telling people to move their money out the country! Surely this is the real reasons South African companies are shrinking/ struggling as the investment money they require to grow and create jobs is now invested offshore, using our money to grow( or often) not grow offshore businesses who then funds other countries tax burden, and add extra stress onto ours! Surely this i snot good advice. It is because advisors are paid commission offshore in Dollars? I know that if you were in America, Canada, Australia, England and any European country and you got up onto a stage and encouraged people to take their money out of their birth country and invest it elsewhere resulting i that country going into a recession- you will be lynched!

Firstly, it’s not true that you will be lynched. Foreign investors funded the gold and diamond industries here in SA in the 19th and 20th century. Where do you think the capital came from? The Koi or the San people?
They also own about 40-50% of all equities and bonds on our market and invest all over the world at the flick of a button.
The first and most important function of a financial advisor is to get the best returns for his clients at the lowest possible risk..not to the fund the plunder of the ANC elite who have no regard for the long-term wealth of their country.

GSFS obviously having an irrational very bad hair day and cannot see the wood for the trees

Where exactly offshore? Is it a good time to invest in US Stocks where markets have hit all-time highs and, therefore, pose a risk to the whole market? Will the S&P 500 continue to rise at a record pace?

US companies need to continuously receive operating margins of ±12% to continue growing at their current pace (the long-term average is 8%) which is likely unsustainable. Telling people to “invest everything offshore” in the current environment is going against one of the key principles of investing which is to buy low and sell high.

We don’t take all possible money offshore for the yield. We invest against local political risk. Low growth vs no money at all (remember the Zimbabwean who got a cheque for 9 cents- his pension after the crash). Normal investment considerations are not applicable under abnormal circumstances.

Just to add, Brenthurst also have local funds (that invest predominantly in local equity). Should those not be invested in? Just curious. Thanks!

@Magnus. Firstly, i used a Global Balanced Fund as an example as this would be applicable to the general investor. Well done for deflecting the underperformance point made (classic advisor) and for drawing my attention to the Brenthurst Global Equity Fund (ETF)

As per the fund fact sheet since inception (11 July 2018) the Brenthurst Global Equity fund has underperformed its benchmark by 2.9% annualised. The current performance of the fund is 2.6% (annualised in USD) from 11 July 2018 to 30 October 2019. The Rand since that period has weakened by 8.29%, giving you an annualised figure of ±11%, not too shabby mate…However lets compare some other funds over the same time period in Rands.

Satrix S&P 500: 18.12% (Annualised)
Satrix MSCI: 15.46% (annualised)
Satrix World Equity Fund: 13.61% (annualised)

So yes take it offshore…but there are definitely better, cheaper alternatives then Brenthurst.

Meanwhile, our private property portfolio returned 938% over the same period. That’s 188% p.a.

Best one learns to manage one’s own investments. The professionals are useless.

That you don’t seem to understand the difference between compound and simple returns doesn’t inspire a whole lot of confidence in what you’re saying.

We do not compound asset growth as our measure of return.

We have not invested in JSE, unit trusts or funds since 2000 but I suspect they refer to returns as asset growth i.e. price increase year on year and not distributions/dividends against capital invested?

In any event, even our cash flows from the private property portfolio far exceed the returns referred to in this article.

Lol, But how much have you lost with all those karatbars though?

Over 4 Years:
Crypto 1915%
KB Gold 139.7%

KBC to ZAR 365%
KBC to Gold 1616%

@GSFS and Investment Please. Come on guys, are you serious? GSFS – It is not an investors responsibility to help grow an economy, it is a government’s job to facilitate every opportunity for business to thrive – and then get out of the way. The exact opposite of what our government is doing. Investment Pleaser – When a boat is sinking as fast as ours only a fool would stand on deck and wait for the last lifeboat. Get your money out at any exchange rate, I took a big chunk out at the “wrong time” when the Rand tanked to well over R15/US$ after the Nene disaster, but my US investments have still returned close to 30% with the Rand at current levels. Only a fool cannot see that we are rushing down Zimbabwe Road at an ever increasing pace – get your money out while you still can before they shut the gates!

Who in their right mind would keep investing where when the people with the funds and skills to build the economy are being excluded through racist laws like BEE?

The ANC government is a socialist communist organization that discriminates against certain sections of the population.

About NHI they said “the rich will sponsor the poor and the healthy will sponsor the sick”.

They force pension funds etc. to invest the bulk of pensioners money locally while it is a well known fact that this has been to the detriment of pensioners. I guess that might be why Brenthurst has some local funds as they have to invest certain monies locally not by choice? Not sure.

Invest in SA? Do you think your investment will achieve the appropriate risk premium?

Not for me thank you. Else maybe just something like a local World ETF? Simple, cheap and without the amount of local political risk.

At the end of the 90’s SA was dead and buried! General advice was take all your money offshore. Over the next 10 years SA outperformed the US market with roughly 350% in USD. Lesson from history is buy low and sell high. SA is cheap. Great returns come from where you least expect it. In general I am always disappointed in past performance raer view mirror return discussions. Unfortanetely that is what 95% of clients and investors want to discuss. It is “if and when” discussions. Looking through the front window the best advice will typical be the underporfermers ot the last 5 – 10 years but hell nobody wants to hear that despite many researches proving exactly that.

NOT the right time to start buying equities. JSE is a value trap. Also portfolio investment doesn’t do anything for the local economy, only FDI (Fixed Direct Investment) will promote growth. Typical advice now is to go offshore after the fact. Chasing offshore markets at this point BAD advice. The short sellers are waiting for those idiots. US correction/bear market to bring down all markets, including the fragile SA market, and only then it will be time to buy. Patience now will bring huge rewards over the long term.

End of comments.





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