Understand fund’s risks

SATRIX DIVI: BE WARNED, VOLATILITY IS THE NORM HERE

The time to buy such a fund isn’t after it’s done really well, but when it’s just suffered a really poor period. Moneyweb

The Satrix Divi exchange-traded fund (ETF) tracks the FTSE/ JSE Dividend+ Index, which selects 30 stocks on the market with the highest one-year forecast dividend yield.

After launching in 2007, it was one of the best-performing local funds in the 2008 market crash. Four more years of outperformance followed.

The Satrix Divi had done so well that many investors believed it would always deliver market-beating returns; many bought into the fund on the strength of this performance alone.

What happened next, however, was a significant reversal. The performance of the Dividend+ Index slowed dramatically in 2013 and 2014. In 2015, it lost nearly 20%, while the All Share (Alsi) was up 5.1%.

Suddenly questions were asked about this strategy’s suitability and whether choosing stocks purely on their forecast dividend yield was a good idea. Since the index didn’t take the quality of company earnings into account, it became obvious that this strategy could deliver varied results.

Inevitably, this decline in fortunes led investors to sell.

But in 2016 the index jumped 24.7% when the Alsi was up just 2.6%, and in 2017 it gained another 27.3%. The Satrix Divi is now the best-performing local ETF over the last two years, and over ten years its return is again higher than the Alsi.

Over the last five years the Dividend+ Index has been significantly more volatile than the Alsi.

This is essentially a value fund. It’ll have periods of extreme underperformance, but also deliver spikes of outperformance.

What good value strategies also deliver, however, is downside protection.

Value funds won’t be as hard hit when markets crash. Over the last ten years, the Dividend+ Index has seen a maximum drawdown of 32.4%. For the Alsi it’s 45.4%.

Over the full ten years, the Dividend+ therefore has a better return/risk ratio than the Alsi.

This shows that, as with all good value strategies, if investors can sit out the weak periods, there should be long-term rewards.

The Dividend+ Index also clearly offers diversification benefits as its performance differs quite a lot from the Alsi and the Top 40.

It’s also delivered on its primary objective – to deliver dividend yield. Is now the time to invest? After two such good years, it’s likely the Satrix Divi will again attract investors chasing performance.

However, technical analysis by Phoenix Investment Analytics’ Peet Serfontein shows the shortcomings in this approach.

Having gained over 30% in the last six months, the Satrix Divi is now trading more than two standard deviations above its “fair price”, which, Serfontein says, suggests a potential 13% correction.

Currently the trend remains bullish, but there’s a good chance the performance may taper off again.

This also suggests investors buying into the Satrix Divi might again be doing so at the wrong point in the cycle. The time to buy a fund like this isn’t after it’s done really well, but when it’s just suffered a really poor period.