The JSE has not been the greatest place to invest over the last five years. For most of this period, the market was moving sideways.
Between September 2013 and July 2017, the FTSE/JSE All Share Index (Alsi) was even slightly down. Only the periods before and after that have delivered any growth.
The market has therefore been well short of its historical average return of around 14% per annum. With dividends reinvested, the (Alsi) has shown annualised growth of less than 11% since the middle of June 2013.
Over the last three years, the picture is even worse. The rally in the second half of last year represents the only period of sustained growth the market has seen since the middle of 2015. Annualised returns for this period are below 7%, and only marginally above inflation.
This has created an environment in which it has been very difficult for asset managers to generate good returns for investors. The market in general has been weak, and that naturally has the effect of pulling everyone down.
Perhaps more significantly, however, is that it has been very hard for any fund to generate any meaningful out-performance. In other words, it’s not just that the market has been weak, but managers have struggled to find ways of beating it. This may be because the market has generally operated on a single theme, and there has been little for asset managers to exploit to deliver excess returns.
As the table below shows, there are only 10 actively-managed equity funds that have produced returns ahead of the top-performing local Alsi index tracker for the five years to the middle of June this year. Over three years, there are only five of them.
* These funds are index trackers.
It is noteworthy that four funds have out-performed over both periods – the Aylett Equity Prescient Fund, Allan Gray Equity Fund, ClucasGray Equity Prescient Fund, and Fairtree Equity Prescient Fund. This shows some degree of persistence, although investors should be careful to attach too much significance to this over such relatively short time periods.
It’s also interesting that these four funds look very different to each other. The only stock that appears in the top 10 holdings across all four is Sasol.
The only common theme to be found here is that they are probably more exposed to resources than most South African equity funds. The Fairtree fund in particular has nearly a third of its portfolio in this sector.
This means that these funds have benefited from the rebound in the likes of Anglo American and BHP Billiton since the start of 2016. Over this period BHP Billiton’s share price has more than doubled, while Anglo American’s price has shot up around 450%.
It’s also significant that while Naspers is a prominent holding in three of the four, their exposures are not excessive. Fairtree has the largest exposure to the counter at 11.37%, while Allan Gray and ClucasGray both have around 7% of their portfolios in Naspers.
The Aylett fund currently has no exposure to Naspers at all.
This shows that even though Naspers has largely driven the index return on its own over the last five years, it’s not the managers that have piled into this share that have come out best off. This highlights the truth of the adage that to beat the index, you have to build a portfolio different to the index. This remains true even when you are dealing with a stock as dominant as Naspers.
A final point worth noting is how the smaller managers have used their size to their advantage by taking meaningful positions in small- and mid-cap stocks. Being able to take relatively large stakes in the likes of Transaction Capital, Clover, Reunert and Zeder gives these managers the chance to play in a different part of the market.
Not all of these shares have necessarily performed all that wonderfully over the last five years, but they do give these managers access to different potential sources of return. In a market where growth is hard to find, that can be a significant advantage.
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