Higher re­turns from lower-risk as­sets

Equities may pro­duce good re­turns over the long term, but they can show losses over shorter pe­ri­ods, such as the past quar­ter. re­ports on how unit trusts in the var­i­ous mar­ket sec­tors have fared.

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Unit trust in­vestors with larger ex­po­sure to higher-risk as­sets such as equities were not re­warded with higher re­turns in the quar­ter to the end of June and, in fact, had lower re­turns than in­vestors in a num­ber of lower-risk cat­e­gories, John Or­ford, a se­nior port­fo­lio man­ager at the Old Mu­tual In­vest­ment Group’s MacroSo­lu­tions, says.

Re­turns were se­verely af­fected by Bri­tain’s vote to leave the Euro­pean Union. One-year re­turns for higher-risk unit trust sub-cat­e­gories came in well below the an­nual re­turns over three years, he says.

South African equities, as mea­sured by the Share­holder Weighted All Share In­dex, were up three per­cent in rand terms from the start of the quar­ter un­til the out­come of the Brexit vote was an­nounced. They then fell, Or­ford says, and ended the quar­ter only 1.3 per­cent up.

Dun­can Ar­tus, a port­fo­lio man­ager at Al­lan Gray, says the lo­cal eq­uity mar­ket is, ef­fec­tively, an in­ter­na­tional mar­ket, with the for­tunes of many big shares un­re­lated to the South African econ­omy, but af­fected by global eq­uity sell-offs in times of un­cer­tainty, such as that which oc­curred post the Brexit vote.

Paul Hansen, Stan­lib’s re­tail in­vest­ing man­ager, says a stronger rand re­sulted in lower re­turns from rand-hedge shares (which earn a large por­tion of their prof­its over­seas), such as SAB Miller.

The FTSE JSE All Share In­dex re­turned just 0.44 per­cent for the quar­ter and 3.84 per­cent for the year to the end of June. South African eq­uity funds had an av­er­age re­turn of 0.48 per­cent for the quar­ter and 1.54 per­cent for the year.

The four best-per­form­ing funds over the year to the end of June show that the value or val­u­a­tion-based man­agers are mak­ing a come­back: the In­vestec Value Fund (with a stel­lar 48.57 per­cent re­turn), the Stan­dard Bank Value Fund, the In­vest­ment So­lu­tions Multi-man­ager Eq­uity Fund of Funds and the Al­lan Gray Eq­uity Fund.

Or­ford says that, like lo­cal equities, global equities were up 1.7 per­cent in rands be­fore the Brexit vote, de­spite the stronger rand, and ended only 0.8 per­cent up for the quar­ter.

South African prop­erty, as mea­sured by the South African Listed Prop­erty In­dex, was down 0.9 per­cent be­fore the Brexit vote but ended marginally up by the end of the quar­ter. Or­ford says this in­dex does not in­clude Intu Prop­er­ties and Cap­i­tal & Coun­ties, JSE-listed Bri­tish pro-perty com­pa­nies, that fell hard fol­low­ing the Brexit vote.

Global and lo­cal bonds ral­lied on the back of the Brexit vote, as did gold, tra­di­tion­ally re­garded as a safe haven in times of un­cer­tainty.

The re­turns of the re­spec­tive as­set classes ex­plain why funds with higher ex­po­sure to fixed­in­come as­sets out­per­formed those with higher ex­po­sures to equities.

Or­ford says the sell-off in equities im­me­di­ately after Brexit has largely been re­versed, with lo­cal and global equities con­tin­u­ing to make gains in the first few weeks of this quar­ter. Rand strength, how­ever, has re­sulted in South African equities con­tin­u­ing to out­per­form global equities in rand terms over the past three weeks.

Anet Ah­ern, the chief ex­ec­u­tive of PSG As­set Man­age­ment, says the worst sell-offs after Brexit were Bri­tish prop­erty stocks and Bri­tish and Euro­pean bank­ing stocks. PSG port­fo­lios were not ex­posed to these sell-offs, be­cause the shares were over­priced. When you own shares at in­flated prices, you are more sus­cep­ti­ble to losses in the event of un­ex­pected shocks, she says.


Brexit has in­tro­duced pol­icy and eco­nomic un­cer­tainty in the United King­dom, which is likely to ex­pe­ri­ence a sharp slow­down in growth over the next year, Or­ford says. This will have a marked im­pact on UK­ex­posed com­pa­nies, but the broader eco­nomic im­pact of Brexit is likely to be con­tained, with mar­kets con­tin­u­ing to fo­cus on the United States and China, he says. The most im­por­tant im­me­di­ate con­se­quence is that pol­icy mak­ers, in­clud­ing the Fed­eral Re­serve Bank, are likely to main­tain mon­e­tary eas­ing.

Or­ford says al­most a third of global bond mar­kets are of­fer­ing neg­a­tive yields, mak­ing the yields of emerg­ing-mar­ket bonds, such as South African bonds, rel­a­tively at­trac­tive to in­vestors.

Hansen says the US stock mar­ket, as rep­re­sented by the S&P 500 and Dow Jones in­dices, mov­ing to a record high for the first time in 14 months, could sig­nal an end to an 18-month up-and-down trad­ing pat­tern. It is prob­a­bly be­cause the re­ces­sion in US com­pany earn­ings is over. These earn­ings could show dou­ble- digit year- on- year growth this quar­ter, he says.

Steady US in­ter­est rates are also help­ing, and could help other stock mar­kets, in­clud­ing the JSE, to move up, Hansen says.

The very low bond yields around the world is very good news for global and lo­cal listed prop­erty and lo­cal fi­nan­cial shares, he says.

He says in­vestors glob­ally have been wor­ried about fi­nan­cial mar­kets since the be­gin­ning of the year and many have sold out, but they could be en­ticed back if the mar­kets re­cover as well as the US has lately.

Ah­ern says the Brexit fear and un­cer­tainty has cre­ated op­por­tu­ni­ties to buy qual­ity shares, bonds and listed prop­erty – though not UK listed prop­erty – at dis­tressed prices in the UK and Europe.

Ah­ern says that in South Africa fears around a po­ten­tial debt down­grade are priced into many fi­nan­cial and in­dus­trial shares on the JSE and PSG has been find­ing good busi­nesses at very good prices, par­tic­u­larly in the bank­ing sec­tor.

Ar­tus says there are many in­vest­ment risks be­sides the im­pact of Brexit. The most wor­ry­ing one is that there is no prece­dent for the great­est mon­e­tary ex­per­i­ment in his­tory that cen­tral banks around the world are car­ry­ing out. He says Al­lan Gray re­mains cau­tious about in­vest­ing in se­cu­ri­ties that have ben­e­fited from “un­sus­tain­able de­mand bor­rowed from the fu­ture”.

Ah­ern says di­ver­si­fi­ca­tion is in­cred­i­bly im­por­tant given the un­cer­tainty in in­vest­ment mar­kets. She sug­gests you di­ver­sify glob­ally among as­set classes, sec­tors, shares, credit is­suers and fund man­agers. And don’t write off cash, she says: it pro­vides sta­bil­ity and pur­chas­ing power dur­ing pe­ri­ods when prices dip.

Ar­tus says the big­gest fac­tor in your re­turns is your own be­hav­iour. Rather than re­act­ing emo­tion­ally to short-term mar­ket events, you should adopt a long-term ap­proach.

Mar­ket volatil­ity can present op­por­tu­ni­ties for long-term in­vestors to buy se­cu­ri­ties at at­trac­tive dis­counts, he says.

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