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|
|SA equity general||9.65%||-3.04%||12.69%|
|SA multi-asset high equity||11.05%||-0.05%||11.10%|
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|
|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.
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
South African multi-asset high equity funds
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.
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.