Investors end the year on sour note
Local equity funds are likely to end off worse than they began
● The year 2018 won’t be celebrated by investors with exposure to local equities because they are likely to end the year worse off than they began.
South African general equity funds are, on average, down 11.28% and multi-asset funds that invest across asset classes but have a high equity component — those typically used by retirement savers — are down 5.54%, Morningstar data for the year to the end of November shows.
Only multi-asset or balanced funds with less than 40% in equities achieved a positive average return — a paltry 0.21% for the year.
Very few investment managers outperformed the average and achieved positive returns over the year.
The poor performance of balanced funds with high exposure to equities is partly explained by the returns on the JSE.
The all share index returned -12.56%, with larger shares such as Naspers, Richemont, MTN, Aspen and Tiger Brands down by between 30% and 40%.
Listed property shares, as measured by the South African listed property index, were down a massive 21.28%.
There was some relief for managers who took refuge in bonds and cash — their respective indices show returns of 11.37% and 7.52% for the year to November.
Long-term investors should be focused on longer-term returns in line with their investment horizon, but understanding why shortterm returns are bad can help you focus.
Nkareng Mpobane, chief investment officer at Ashburton Investments, says after multiple years of declining economic growth and rising risks to SA’s credit rating, the local equity market bore the brunt of pressure on emerging markets. Foreign investors have been net sellers of local equities since 2015, while other emerging markets enjoyed net inflows. This year, investors sold out of emerging markets around the world and turned net sellers of South African bonds too, she says.
Investors in global equity and multi-asset funds have done a little better, with positive single-digit returns for the 11 months to the end of November. But local investors’ favourite global fund, the Allan Gray Orbis Global Equity Fund, delivered -6.4% for the first 11 months.
The past year’s negative returns follow four years of very low returns for many investors in local markets.
The country’s largest multi-asset or balanced fund, the Allan Gray Balanced Fund, for example, had a negative return of 6.25% over the year to the end of November and delivered a barely-above-inflation 7.14% a year for the five years to end-November.
Average returns over five years for the multi-asset funds range from 5.2% to 6%.
The low returns have seen many investors choosing fixed interest funds instead.
Statistics from the Association of Savings & Investments of SA show inflows from retail investors into South African unit trust funds (excluding money market funds) are likely to be the lowest for the past six years. Flows into multi-asset funds are down from R91bn in 2014 to R9bn for the year to end-October.
Investors expecting balanced funds to allocate to the best asset classes have been asking why Allan Gray’s Balanced Fund didn’t invest more in cash, given the outperformance of cash relative to equities over the past few years.
Andrew Lapping, Allan Gray’s chief investment officer, responded in a post on the managers’ website saying the focus was on capturing long-term returns. He acknowledged that cash has outperformed equities frequently in the past, but says equities have outperformed over more periods of time and, when measured over long periods, by a substantial margin.
Over the past 20 years — the time horizon you should be looking at if you are saving for retirement — South African equities have returned 12.5% a year compared to 8.2% a year for cash, he says.
Lapping says the Orbis Global Fund’s poor short-term performance was not unusual given its contrarian stance, and that its longterm, 10-year return is a healthy 14.5%.
Managers such as Allan Gray typically focus on being rewarded over periods longer than a year. And they base their decisions on where to invest on the valuations of shares or other securities (prices relative to earnings).
They sell shares and generate cash when they believe shares are overvalued and use cash to buy undervalued shares when prices drop.
Lapping says that at current valuations, Allan Gray believes the shares it holds will outperform cash over the next four years and give investors solid, real returns.
Graham Tucker, portfolio manager at Old Mutual Investment Group’s MacroSolutions, says managers have to be careful not to be caught up in good or bad news and must instead consider what they are paying for shares to be sure it is less than the fair value, providing a margin of safety.
PSG Asset Management CEO Anet Ahern says that before the recent market decline many shares were trading at high price-toearnings multiples but now many are trading 50% or more below their five-year highs.
Ahern says markets react very quickly but not always appropriately to news, as they did with President Cyril Ramaphosa’s appointment.
It was a perfect illustration of short-term overreaction that was in contrast with the longer-term reality. It takes a long time to turn a company or country around, and investing on the basis of news is not always wise, she says. It is far better to bear longterm valuations in mind, rather than shortterm sentiment, Ahern says.
Mpobane says the valuation of South African shares, excluding Naspers, is at levels not seen since May 2012 and it can be argued that the market has priced in recessionary conditions.
Victoria Reuvers, a director and senior portfolio manager at Morningstar, says you should remember the economy is not the market. When it comes to the market, what matters most is not overpaying for a stream of long-term cash flows.
Reuvers says many businesses that focus on the local market are out of favour with investors because of the persistent gloomy economic outlook in SA, but possible policy reform geared towards economic growth could unlock value if you purchase shares at below fair value.
She says there is no doubt that the current market conditions are unsettling, but you should avoid making irrational changes and stick with a diversified portfolio tilted towards the asset classes likely to deliver good returns in the future.