Up until the start of June this year, the JSE was basically flat over the past three years. South African equity fund managers had very little to cheer them up over this period.
However, over the last three months the local market has enjoyed something of a revival. Since hitting a bottom on June 6, the All Share Index has climbed over 13% and is now trading at record highs.
As the below figures from Morningstar show, the funds that have benefited the most from this short-term surge are those tracking momentum indices.
|Top South African equity funds for the 3 months to October 6 2017|
|Fund||3 month return|
|Ashburton Momentum SA Tracker Fund A||16.49%|
|Momentum Trending Equity Fund A||14.13%|
|Momentum MoM Emerging Manager Growth Fund F1||13.92%|
|Satrix Momentum Index Fund A1||13.73%|
|Methodical Equity Prescient Fund A1||12.68%|
|Stanlib Sector Neutral Momentum Index Fund A1||12.45%|
Note: Not all of these funds are available to retail investors.
These momentum indices essentially include stocks that are showing the biggest positive short-term price movements. In sharp market upturns, they can therefore capture some very quick, very large gains.
Looking over the slightly longer term, however, the top funds so far this year have been those tracking the FTSE/JSE Top 40 Index. As the table below shows, only one active manager is ahead of a pack of passive funds.
Even that is an anomaly though, as the Lion of Africa MET Equity Fund is currently being wound up. Its performance is therefore not really a true reflection, as its current portfolio is 100% cash.
|Top South African equity funds for the YTD months to October 6 2017|
|Fund||Year to date return|
|Lion of Africa MET Equity Fund A||26.00%|
|Prescient Equity Top 40 Fund A1||18.94%|
|Stanlib ALSI 40 Fund A||18.92%|
|Satrix Top 40 Index Fund A1||18.68%|
|Momentum Top 40 Index Fund A||18.67%|
|Sygnia Top 40 Index Fund A||18.57%|
|Momentum MoM Emerging Manager Growth Fund F1||18.44%|
|Old Mutual Top 40 Index Fund A||18.37%|
|Kagiso Top 40 Tracker Fund||18.28%|
|Ashburton Low Beta SA Composite Tracker Fund A||18.19%|
This performance from Top 40 trackers should not, however, be seen so much as a case for passive over active, as what can happen when one stock dominates an index. Naspers is currently around 21% of the Top 40, which means that its influence is immense.
The media giant has gained 59% this year, which accounts for easily the bulk of the gains in the Top 40. Active managers will almost inevitably underperform this index over a period like this as it is very difficult, and arguably not prudent, for any of them to take such a large position in a single company.
This has become one of the biggest criticisms of local index funds. They are now exposing investors to very high single stock risk. At the moment it is obviously to their benefit, but what happens when Naspers, which is now trading on a price-to-earnings ratio of around 130, goes the other way?
This is why even the majority of managers who are bullish on Naspers carry what is effectively an underweight position in the stock, relative to the index. The Coronation Top 20 Fund, which would be the next highest active fund on the above performance list, holds 16.5% of its portfolio in Naspers, and that is in a highly concentrated portfolio.
Investors therefore need to carefully consider their exposure to local index funds. Clearly there is a place for them, and they have done exceptionally well, but the argument for diversification is becoming increasingly strong.
To manage risk and have a more balanced portfolio, investors should think of combining index funds with funds run by high conviction active managers who build portfolios that look very different to the index. That offers them the best of both worlds.
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