MANAGED FUNDS

We’ve taken a slightly different approach to our fund selections this month — instead of assessing funds in one category we’ve pulled the top four best performers over one year, according to the Equinox funds website. We selected funds with a minimum three-year track record.

Generally we assess funds within an asset class or investment style theme so we make for like-for-like comparisons. The top four include two property funds, a financial fund and a dividend growth themed fund. The skill of the manager is usually best assessed within an asset class as overall performance can be driven by luck — at some point every industry will have a purple patch, but it’s how the funds within that speciality shake out that can reveal the best investors.

Equinox ranks performance on a 12-month sell-sell basis, and the Coronation Financial Fund heads the pack with a return of 27.5%, edging out Marriott’s Dividend Growth Fund on 26.6%. Next up is the Catalyst SA Property Equity PSG Fund (25.5%), followed by the Catalyst Global Real Estate PSG Feeder Fund (25%). Note that these figures are different to those in the tables with the fund reviews on the next two pages, which are based on annualised returns.

Clearly property has been a good investment — the three-year returns for most of the property funds are exceptional. Even on a one-month view, Catalyst Fund Managers says the South African listed property sector recorded the highest total return (6.84%) of the four traditional asset classes for October. Bonds (3.41%) and equities (1.01%) were next best.

Over the past 12 months, listed property has overtaken equities as the best-performing asset class, but that is being driven more by global macroeconomic factors that property companies cannot control, says Paul Duncan, co-manager of the Catalyst SA Property Equity PSG Fund.

Locally, at real estate level, the picture is challenging. “The fundamentals for the property market are probably under more pressure now than for years,” he says. “We have a weak economic underpin; an oversupply of stock, especially in the office market, so there is less scope to increase rentals; and consumer disposable incomes are under mounting pressure from rising costs, so retail turnover is not buoyant. And rising administered costs such as property rates and electricity tariffs have to be passed on to tenants, which increases the overall occupancy cost of tenants. There is no lowhanging fruit to reduce costs.”

Furthermore, interest rates are likely to rise over the next few

That the sector emerged unscathed is a reflection of the quality of SA’s banks and insurance companies

years and property companies will need to service that higher cost for acquired assets.

“That’s where we are in the cycle,” Duncan says. “The market’s outperformance has largely been driven by capital market support rather than better-than-expected earnings growth.”

One important characteristic of the macro picture, he says, is that over the past few months expectations of an interest rate hike in the US have receded while Japan and the EU are continuing with monetary stimulus programmes.

Listed real estate shares tend to be highly correlated with other fixed income investments and in the past few months global bond yields have firmed up, with a knock-on effect in SA. This is on expectations of lower growth and lower inflation. While property yields move down in line with bonds, share prices tend to go up.

The risk to local property investments, he says, is if the capital markets turn. “Then we’ll be hit on two fronts: interest rates go up but there are no good property fundamentals to cushion the effects.”

The financial sector has been the strongest-performing sector of the past 12 months — a period that has included two dramatic events: the curatorship of African Bank and the downgrading of SA’s banks by ratings agency Moody’s. FirstRand, Standard Bank, Absa Bank, Nedbank and Investec were all downgraded to Baa2 with a stable outlook. Capitec’s outlook was adjusted upwards to stable from negative.

The fact that the sector emerged unscathed is a reflection of the quality of SA’s banks and insurance companies. The banking index even appreciated strongly in the days after the downgrade, which might also reflect the opinion investors have of ratings agencies. However, Moody’s did say its decision was driven mainly by weakness in the South African government credit profile coupled with the fact that banks hold a large portion of government debt.

Coronation has been warning for some time now that the sector is looking fairly valued and investors should not expect the same returns as in the past 10 years. In that period the financial index has delivered an annualised return of 17.5% against the fund’s 18.6%. That shows good outperformance from Coronation.

Finally, the benefits of investing in good dividend payers are reflected in the Marriott Dividend Growth Fund. It invests in companies that produce consistent, growing dividends and avoids cyclical industries which tend to have more volatile income streams.