MAN­AGED FUNDS

Financial Mail - Investors Monthly - - Contents - COLIN AN­THONY

We’ve taken a slightly dif­fer­ent ap­proach to our fund selections this month — in­stead of as­sess­ing funds in one cat­e­gory we’ve pulled the top four best per­form­ers over one year, ac­cord­ing to the Equinox funds web­site. We se­lected funds with a min­i­mum three-year track record.

Gen­er­ally we as­sess funds within an as­set class or in­vest­ment style theme so we make for like-for-like com­par­isons. The top four in­clude two prop­erty funds, a fi­nan­cial fund and a div­i­dend growth themed fund. The skill of the man­ager is usu­ally best as­sessed within an as­set class as over­all per­for­mance can be driven by luck — at some point ev­ery in­dus­try will have a pur­ple patch, but it’s how the funds within that spe­cial­ity shake out that can re­veal the best in­vestors.

Equinox ranks per­for­mance on a 12-month sell-sell ba­sis, and the Corona­tion Fi­nan­cial Fund heads the pack with a re­turn of 27.5%, edg­ing out Mar­riott’s Div­i­dend Growth Fund on 26.6%. Next up is the Cat­a­lyst SA Prop­erty Eq­uity PSG Fund (25.5%), fol­lowed by the Cat­a­lyst Global Real Es­tate PSG Feeder Fund (25%). Note that th­ese fig­ures are dif­fer­ent to those in the ta­bles with the fund reviews on the next two pages, which are based on an­nu­alised re­turns.

Clearly prop­erty has been a good in­vest­ment — the three-year re­turns for most of the prop­erty funds are ex­cep­tional. Even on a one-month view, Cat­a­lyst Fund Man­agers says the South African listed prop­erty sec­tor recorded the high­est to­tal re­turn (6.84%) of the four tra­di­tional as­set classes for Oc­to­ber. Bonds (3.41%) and eq­ui­ties (1.01%) were next best.

Over the past 12 months, listed prop­erty has over­taken eq­ui­ties as the best-per­form­ing as­set class, but that is be­ing driven more by global macroe­co­nomic fac­tors that prop­erty com­pa­nies can­not con­trol, says Paul Dun­can, co-man­ager of the Cat­a­lyst SA Prop­erty Eq­uity PSG Fund.

Lo­cally, at real es­tate level, the pic­ture is chal­leng­ing. “The fun­da­men­tals for the prop­erty mar­ket are prob­a­bly un­der more pres­sure now than for years,” he says. “We have a weak eco­nomic un­der­pin; an over­sup­ply of stock, es­pe­cially in the of­fice mar­ket, so there is less scope to in­crease rentals; and con­sumer dis­pos­able in­comes are un­der mount­ing pres­sure from ris­ing costs, so re­tail turnover is not buoy­ant. And ris­ing ad­min­is­tered costs such as prop­erty rates and elec­tric­ity tar­iffs have to be passed on to ten­ants, which in­creases the over­all oc­cu­pancy cost of ten­ants. There is no lowhang­ing fruit to re­duce costs.”

Fur­ther­more, in­ter­est rates are likely to rise over the next few

That the sec­tor emerged un­scathed is a re­flec­tion of the qual­ity of SA’s banks and in­surance com­pa­nies

years and prop­erty com­pa­nies will need to ser­vice that higher cost for ac­quired as­sets.

“That’s where we are in the cy­cle,” Dun­can says. “The mar­ket’s out­per­for­mance has largely been driven by cap­i­tal mar­ket support rather than bet­ter-than-ex­pected earn­ings growth.”

One im­por­tant char­ac­ter­is­tic of the macro pic­ture, he says, is that over the past few months ex­pec­ta­tions of an in­ter­est rate hike in the US have re­ceded while Ja­pan and the EU are con­tin­u­ing with mon­e­tary stim­u­lus pro­grammes.

Listed real es­tate shares tend to be highly cor­re­lated with other fixed in­come in­vest­ments and in the past few months global bond yields have firmed up, with a knock-on ef­fect in SA. This is on ex­pec­ta­tions of lower growth and lower in­fla­tion. While prop­erty yields move down in line with bonds, share prices tend to go up.

The risk to lo­cal prop­erty in­vest­ments, he says, is if the cap­i­tal mar­kets turn. “Then we’ll be hit on two fronts: in­ter­est rates go up but there are no good prop­erty fun­da­men­tals to cush­ion the ef­fects.”

The fi­nan­cial sec­tor has been the strong­est-per­form­ing sec­tor of the past 12 months — a pe­riod that has in­cluded two dra­matic events: the cu­ra­tor­ship of African Bank and the down­grad­ing of SA’s banks by rat­ings agency Moody’s. FirstRand, Stan­dard Bank, Absa Bank, Ned­bank and In­vestec were all down­graded to Baa2 with a sta­ble out­look. Capitec’s out­look was ad­justed up­wards to sta­ble from neg­a­tive.

The fact that the sec­tor emerged un­scathed is a re­flec­tion of the qual­ity of SA’s banks and in­surance com­pa­nies. The bank­ing in­dex even ap­pre­ci­ated strongly in the days after the down­grade, which might also re­flect the opin­ion in­vestors have of rat­ings agen­cies. How­ever, Moody’s did say its decision was driven mainly by weak­ness in the South African gov­ern­ment credit pro­file cou­pled with the fact that banks hold a large por­tion of gov­ern­ment debt.

Corona­tion has been warn­ing for some time now that the sec­tor is look­ing fairly val­ued and in­vestors should not ex­pect the same re­turns as in the past 10 years. In that pe­riod the fi­nan­cial in­dex has de­liv­ered an an­nu­alised re­turn of 17.5% against the fund’s 18.6%. That shows good out­per­for­mance from Corona­tion.

Fi­nally, the ben­e­fits of in­vest­ing in good div­i­dend pay­ers are re­flected in the Mar­riott Div­i­dend Growth Fund. It in­vests in com­pa­nies that pro­duce con­sis­tent, grow­ing div­i­dends and avoids cycli­cal in­dus­tries which tend to have more volatile in­come streams.

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