Equity funds may have fallen short

BIG GAINS: RESOURCE STOCKS GAINED MASSIVE 44.6%

It’s not because of Naspers. Moneyweb

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.

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.

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%.

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.

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.

It’s important 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.