For the 12 months to the end of June this year the FTSE/JSE All Share Index (Alsi) was up 15%. The average return from unit trusts in the South Africa equity general category for the same period was, however, just 7.9%.
In other words, the average fund manager delivered barely more than half of the return of the market.
Figures from Morningstar show that only 17 funds in the category beat the broad market benchmark over this period. Nine of those are passive funds. One hundred and forty eight, underperformed.
Even accepting that equity funds should not be judged on one-year numbers, these are pretty eye-catching statistics. This is particularly the case in the current low return environment.
South African investors have had to stomach relatively poor returns for the better part of four years. Yet, in a period when the market actually produced decent performance, most of them still didn’t see it because their fund managers didn’t capture it.
The Naspers argument
It might be easy to say that this is because of the Naspers effect. The tech giant, which now makes up more than 20% of the Alsi, gained close to 37% in this 12-month period. That is a substantial part of the market return.
Given that any fund manager employing proper risk management would not have 20% of their portfolio in any single stock, every active manager in the country is underweight Naspers. None of them would therefore have been able to get the full benefit of its rally.
That’s the simple explanation. It also happens to be incomplete.
If your fund manager tells you that they underperformed because of Naspers, they are not being completely honest. That is quite easily demonstrated by the table below, which shows the top 10 performing general equity funds for the 12 months to end June:
|SA equity general fund performance to June 30, 2018|
|Fund||1 year return|
|Sygnia Divi Index Fund A||24.92%|
|Satrix Dividend Plus Index Fund A1||24.49%|
|Satrix Quality Index Fund A1||22.33%|
|Coreshares S&P SA Top 50 Fund A||22.00%|
|Prescient Equity Income Fund A1||18.50%|
|ClucasGray Equity Prescient Fund A1||18.45%|
|Satrix Rafi 40 Index Fund A1||18.21%|
|Old Mutual Rafi 40 Index Fund A||18.06%|
|Fairtree Smart Beta Prescient Fund A1||17.58%|
|Momentum Value Equity Fund A||17.55%|
|FTSE/JSE All Share Index||15.02%|
Of the top five funds on that list, four have no exposure to Naspers at all. Only the Coreshares S&P Top 50 Fund holds the stock, and it caps its exposure at 10%.
Naspers is the biggest holding in the ClucasGray Equity Prescient Fund, but at only 7.5% of its portfolio. The Satrix and Old Mutual Rafi funds both down-weight Naspers to under 4.0%.
It is therefore quite apparent that Naspers is not the primary reason for the outperformance of these funds. That must come with the corollary that the stock is also therefore not the primary reason for the underperformance of any other fund.
So what’s the driver?
The most important factor contributing to returns over the last 12 months has actually been resource stocks. For the year to the end of June the FTSE/JSE Resources 10 Index gained 44.6%.
BHP Billiton was up over 55% during this period, Anglo American gained around 76%, and Sasol climbed 37%. Those are the three biggest resource counters on the local market.
For good measure, Exxaro’s share price was around 35% higher and Kumba Iron Ore jumped 67%. African Rainbow Minerals gained just under 21%.
It should therefore be no surprise that the top five holdings in the Sygnia and Satrix dividend funds are resource counters – African Rainbow Minerals, South32, Exxaro, BHP Billiton and Kumba. Similarly, because the Coreshares Top 50 fund caps the size of Naspers, it increases the weightings of BHP Billiton and Anglo American in its portfolio.
The Rafi funds are also overweight BHP Billiton and Sasol. The Prescient Equity Income Fund has Kumba, BHP Billiton and Anglo American in its top 10 holdings.
It is quite apparent that this has been the key factor in their outperformance. And it has been far more significant than their exposure to Naspers.
So your manager sucks, right?
While this does rebut the Naspers argument to a fair extent, it doesn’t negate the principle. Whether it’s Naspers or these few resource counters, the market return has still been generated by a very narrow selection of stocks.
If your fund manager held these, you would have been okay. If they didn’t, you have missed out.
What is apparent is that the majority of fund managers obviously didn’t hold these stocks, given the degree of underperformance over the past year. It might be easy to criticise them for this since missing the resources rally completely has cost investors a chunk of potential returns.
However, it’s more important is to understand why your fund manager didn’t hold these stocks. Can they provide good reasons, and demonstrate a sound philosophy behind that thinking?
If they can’t, it’s time to find another manager. If they can, that’s more important than missing the short-term performance in a handful of shares.
What really matters is whether the philosophy your fund manager is following delivers the outcomes you are looking for over the long term. That might mean short-term misses, but investing is all about the long game.