Asset Manager Review

IN February 2015, the theme of our Asset Manager Review was, “Is the bull market ending?” We commented that South African investors had been well treated by the investment markets over the previous ten years or more, despite the “Global Financial Crisis” of 2008-09.

Over the ten years up to the end of 2014, most Global Balanced investment products as used by South African retirement funds beat inflation by about 9% per year or better, before fees.

Things have indeed changed somewhat since then. While there has not been an outright market crash, returns from both our bond and equity markets have been lacklustre.

In fact, the first quarter of 2015 was a good one for investors, with before-fees returns typically around 5% for the quarter. But the subsequent period has been quite disappointing.

The median (mid-ranking) return achieved by the investment managers and funds in our Global Balanced survey category, over the two years to the end of March 2017, was only 5.2% per year – and this is before fees.

By comparison, inflation was running at 6.2% per year over this period. This means most retirement fund members will have experienced below-inflation returns for two years in a row. This will be particularly disappointing to pensioners who have invested in “living annuity” products, hoping for good returns to boost their retirement incomes.

Turning to the latest quarter, it is at least pleasing that most asset classes yielded moderately positive returns, so that most investment managers achieved performance of close to 3% before fees.

Global equity markets fared quite well, with investors willing to take on risk in pursuit of good returns, which helped emerging markets in particular.

In Rand terms, emerging-market equities returned 9.3% for the first quarter of 2017, as compared with 4.5% for developed-market equities.

By comparison, the returns for the local equity market, while not bad, were a bit disappointing. The JSE’s All-Share Index gained 3.8% over the quarter. It is likely that political tensions played some role in moderating returns, although the rather weak domestic economy may also have been a factor. The cabinet reshuffle at the end of the month led to a sell-off in banking shares in particular.

It must be said that, despite the rather weak market returns over the last two years, shares listed on the JSE do not look particularly cheap overall, with earnings yields towards the lower end of their historic range.

It would require very good earnings growth from this point to make our market look like a bargain.

Despite the political turmoil, the Rand did strengthen over the quarter, by 1.9% against the Dollar and with smaller gains against the Euro and Sterling. Our local bond market, measured by the All-Bond Index, gave investors a return of 2.5% despite a sell-off in the last week of March.

Perhaps surprisingly, April turned out to be a good month for both our bond and equity markets, and the Rand remained steady. We have commented elsewhere in these pages that investors’ responses to the downgrades for South African bonds announced by credit rating agencies in recent weeks has not been what many people would have guessed!

Over the quarter, Kagiso Asset Management delivered the best performance in the Global Balanced survey category, with a before-fees return of 5.7%, and their 12-month return of 12.1% put them third over that period, behind Re:CM (17.4%) and Aylett (13.4%). Re:CM and Kagiso have struggled to produce good returns in previous years but have benefited from the recent rebound in mining shares.

Of course, three or even twelve months is not long enough to assess whether an investment manager is really skilful. It is important to consider performance over really long periods, at least five years or more.

We have performance data for the South African investment managers going back more than 20 years, and we have used this to look at the “persistence” of manager performance over this period – a theme we have commented on previously.

We broke the last 20 years into four successive five-year periods, and looked at the better-performing firms in each period. We excluded the multi-managers (who themselves aim to invest with the more skilful firms) and we counted each firm only once, as some firms list more than one investment product in the survey tables.

If we define “better-performing” firms as those which rank in the top five over a five-year period, then (remarkably) Allan Gray, Coronation, Foord, Investec and Prudential each scored three top-five positions in the four separate periods considered.

Over the latest five-year period, Coronation, Investec and Prudential rank in the top five single-manager positions, while Allan Gray and Foord occupy the sixth and seventh slots, still comfortably in the top half of the table. However, the first and second positions are held by PSG and Rezco, more recent additions to our survey, who are now building credible track records on quite substantial asset bases.

The five firms that have been so conspicuously successful over the last 20 years probably have some key factors in common. They are “investment-led”, rather than being under the dominance of a large corporate parent.

They have achieved sufficient scale to be able to manage the range of asset classes successfully, including foreign investments, and they probably rank as “employers of choice” for a lot of skilled investment professionals.

Also, in their investment philosophies, they all pay attention to valuations (trying not to over-pay when making investments) and generally avoid getting caught up in the fashions and trends of the moment – i.e. they are willing to take the long-term view.

We would not really have predicted, ten years ago, that these five firms would all have maintained their dominant positions in the industry for another ten years – this is a fairly remarkable result. It will be interesting to look back again in 20 years’ time! May 2017 Erich Potgieter, Willis Towers Watson