Eval­u­at­ing a port­fo­lio’s per­for­mance over three years

In Jan­uary 2014, Gra­didge-Mahura In­vest­ments pre­dicted lower mar­ket re­turns, ad­vis­ing fin­week read­ers to take a more cau­tious ap­proach and mit­i­gate costs where pos­si­ble. How does their pro­posed port­fo­lio mea­sure up?

Finweek English Edition - - MARKETPLACE - Edi­to­rial@fin­week.co.za Craig Gra­didge is a co-founder of Gra­didge-Mahura In­vest­ments. The orig­i­nal ar­ti­cle is avail­able on our web­site at http://bit.ly/2mQebI1.


world looked a bit dif­fer­ent in Jan­uary 2014. At the time, in­ter­est rates had been mov­ing side­ways for over a year, with the like­li­hood of in­creases on the hori­zon. The rand was trad­ing at be­tween R10 and R11 against the dol­lar; oil prices were trad­ing well above $100/bar­rel, and the FTSE/JSE All Share In­dex was trad­ing at a price-to-earn­ings ra­tio (P/E) of around 18. (This com­pares with the mar­ket’s cur­rent P/E ra­tio of 19.9, and the long-term av­er­age P/E of around 14.)

What did you say?

The crux of our mes­sage in Jan­uary 2014 was that the mar­ket was look­ing ex­pen­sive, and risk lev­els were ris­ing, so new in­vestors were likely to be bet­ter off tak­ing less port­fo­lio risk. South Africa was head­ing into national elec­tions, and had been iden­ti­fied as a frag­ile econ­omy based on its cur­rent ac­count and bud­get deficits along with four other emerg­ing mar­ket coun­tries: Turkey, In­dia, In­done­sia and Brazil.

We made two rec­om­men­da­tions to read­ers: re­duce port­fo­lio risk, and hand over as­set al­lo­ca­tion de­ci­sions to suit­ably skilled fund man­agers with di­verse philoso­phies and ap­proaches.

We listed seven funds that we thought read­ers should con­sider (Allan Gray Bal­anced, Allan Gray Sta­ble, Corona­tion Cap­i­tal Plus, Corona­tion Strate­gic In­come, Ned­group Sta­ble, Sa­trix Bal­anced In­dex, and Grindrod Sta­ble – now Bridge Sta­ble). The choice of funds was based on the man­agers’ as­set al­lo­ca­tion track record, costs and the ex­pected cor­re­la­tions be­tween the funds.

How did it work out?

In the graph you can see the per­for­mance of a port­fo­lio with equal weight­ing to the rec­om­mended funds, over the three years since the ar­ti­cle was pub­lished. It has been bench­marked to the mar­ket and to the rel­e­vant unit trust cat­e­gory.

How does our port­fo­lio mea­sure up?

Our call was spot-on as in­vestors have out­per­formed the mar­ket and the sec­tor at much lower lev­els of volatil­ity.

It has been an event­ful three years since the ar­ti­cle was pub­lished, with the ANC los­ing ground in national and lo­cal elec­tions, the de­ba­cle fol­low­ing fi­nance min­is­ter Nh­lanhla Nene’s fir­ing in De­cem­ber 2015, Brexit, the elec­tion of Don­ald Trump as US pres­i­dent, lower com­mod­ity prices, cur­rency weak­ness and low eco­nomic growth as well as poor in­vestor and busi­ness con­fi­dence. This has re­sulted in highly volatile eq­uity mar­kets as in­vestors tried to make sense of ev­ery­thing. While one can ar­gue that a 1.5% out­per­for­mance over three years is not much to get ex­cited about, the im­por­tance of the lower volatil­ity should not be over­looked. There were nu­mer­ous pe­ri­ods where the mar­ket fell in ex­cess of 10% to 15%. It is at these times that in­vestor be­hav­iours are trig­gered, lead­ing to in­vestors mak­ing de­ci­sions that ul­ti­mately re­sult in them ex­pe­ri­enc­ing losses or not meet­ing their in­vest­ment ob­jec­tives.

Our call was spot-on as in­vestors have out­per­formed the mar­ket and the sec­tor at much lower lev­els of volatil­ity.

Ad­vice for the cur­rent en­vi­ron­ment

Our ap­proach to struc­tur­ing port­fo­lios has not changed ma­te­ri­ally. There are still sig­nif­i­cant risks around with lo­cal pol­i­tics dom­i­nat­ing in­vestors’ minds at the mo­ment. The green shoots that gov­ern­ment and busi­ness spoke of last year have not emerged to any sig­nif­i­cant de­gree. Busi­ness and con­sumer con­fi­dence re­mains low, with com­pa­nies opt­ing to in­vest out­side of South Africa or in­crease their cash hold­ings.

We con­tinue to ad­vise clients to adopt a more cau­tious ap­proach for now and will stick with the funds that we chose back in Jan­uary 2014. We still be­lieve that it is ap­pro­pri­ate to hand over as­set al­lo­ca­tion de­ci­sions to suit­ably qual­i­fied and ex­pe­ri­enced as­set man­agers at this stage.

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