Well, if this is the “new normal” – the phrase coined to describe how investors should adjust to lower returns in the post-global financial crunch world – it’s not looking too bad looking at the performance of unit trust funds.
It’s not all good, but certainly not bad, with most categories of unit trust funds giving returns far higher than South Africa’s rate of inflation.
Let’s start with the standard domestic equity general funds, the time-tested unit trusts that sum up how the SA market – and millions of South African unit trust fund investors – are doing.
On average – more accurately, according to the mean of the 77 funds in the category over the year to end-December 2009 – the return was 26.1%.
That didn’t match the 32.1% delivered by the resource-powered FTSE/JSE all-share (Alsi) index over the same period, but it’s not a shabby return.
I’d say thanks and happily put the 26.1% in my back pocket.
However, a number of SA’s equity general funds did handsomely outperform the Alsi over one year, led by the PSG Alphen Growth fund with a return of 43.5%.
Portfolio manager Shaun le Roux is obviously happy with its performance but cautious going forward.
Referring to the “cheap money” – much from offshore, which has been driving share price momentum on the JSE – he says: “It was a hell of a lot easier in March and April last year. Current valuation levels make it difficult to figure out what’s being priced in.”
As always, we emphasise longer-term performance.
And that’s where the Absa Select Equity unit trust comes to the fore.
It claims top spot over three years, with an annualised return of 10.9%, and is first over five years at 22.7%, both significantly outstripping the Alsi.
How does it produce so much alpha?
“Plain, old fashioned bottom-up stock picking and fundamental research,” says fund manager and chief investment officer at Absa Asset Management, Errol Shear.
The domestic general equity funds remain the yardstick for the increasingly complicated unit trust industry and this sector is serving investors well.
But the big question is: How to choose a fund?
There’s no easy answer, but best advice is probably to stick with the established asset manager names with a long track record.
We always say don’t chase the top performers; look for consistency instead.
Names that emerge here are the Allan Gray Equity fund, second over five years with an annualised return of 20.8%, followed by the Prudential Equity fund and Kagiso Equity Alpha fund.
The latter is a prime example of consistency, in second place over three years and third over one year.
However, the smaller boutique managers are stamping their place in the unit trust kraal and that’s probably most apparent in the domestic asset allocation flexible category.
These are the balanced funds more cautious investors are pouring money into, nervous about too much exposure to equities and wanting a professional fund manager to make the all-important asset allocation decisions for them.
Leading the pack here over five years is the Rezco Value Trend fund, a small manager operating out of Port Elizabeth that probably escapes the notice of many retail unit trust investors.
Its annualised return over five years is 19.6%, just a little short of the Alsi’s 20.3% over the same time period.
That top performance comes from the very flexible process of the fund. Its managers aren’t shy to shift most of the portfolio into cash if the market is looking tricky.
That bold asset allocation strategy has served investors well.
Top over three years is the Blue Alpha All Seasons fund, its annualised return of 13.8% double the return of the Alsi. Over one year it’s the 36ONE Flexible Opportunity fund at 32.8%, slightly better than the Alsi – which is a good performance, considering how well the overall market, and particularly resources shares, did last year.
There’s also a 36ONE fund highly placed over one year in the domestic targeted, absolute and real return category, the 36ONE Target Return fund that’s notched up 33.9%.
Performance of the 36ONE funds is at times bumpy because its managers do things a bit differently.
For example, the shares they hold as the top 10 in portfolios are often quite different to what you’d find in other unit trust top10 holdings.
“The fund is run on a fundamental analysis, stock picking approach,” says manager Cy Jacobs. “We look for shares we believe are undervalued by the market.”
Balanced funds have recently become popular with investors.
They’re nervous about the market but still want some exposure to equities.
A balanced fund shifts the responsibility to the fund manager to get the exposure to equities and other asset classes right.
Jeremy Gardiner, a director at Investec Asset Management, says fourth quarter 2009 inflows into equity funds – where most of the money went into balanced funds – highlights two trends. “Investors remain concerned the market recovery that started in March last year was overdone relative to the economic health, both in SA and abroad. And investors realise markets are tricky to call and are choosing to allow portfolio managers to make the asset allocation decision on their behalf.”
Forecasting a “choppy year” ahead, Gardiner expects balanced funds to remain popular.
Even institutional investors are starting to look at the merits of balanced funds.
Anne Cabot-Alletzhauser, chief investment officer at Advantage Asset Managers, says selecting and combining complimentary balanced funds captures asset class trending.
The absolute return funds aren’t providing a real return in many cases.
The mean return for the category over one year is 12.9%, over three years an annualised 7.9% and over five years 10.5%.
However, returns of individual absolute return funds differ widely, some strongly outperforming the market and inflation, others way behind.
But those funds all have different mandates and benchmarks, so performance will vary.
That’s why absolute return funds aren’t ranked by performance on the table.
This writer has been critical of absolute return funds, feeling the additional costs don’t justify performance and downside protection that can be found in an ordinary, cheaper, general equity fund.
But Prieur du Plessis, chairman of the Plexus Group, says it’s because I – and much of the investing public – don’t understand absolute return funds.
“The fact is that the investment mandates, performance objectives and investment strategies of funds in this sector differ vastly. If prospective investors don’t understand exactly what the fund managers are trying to achieve and how they try to attain their objective, the investor may well end up being disappointed,” Du Plessis says.
He quotes a study of returns achieved by such funds over the year to 31 January 2010, showing the variance in returns from 41% to a paltry 3%.
Even over three years variance is wide, ranging from 20.1% to negative 1.8% – a difference of almost 22%.
“The most important consideration for choosing a targeted return fund is its risk-adjusted returns,” he said.
“A fund that achieves a real return (that is, after inflation) of 3%/year with a volatility or standard deviation of 10% is a better risk-adjusted performer than a fund that achieves a real return of 4% a year but with a volatility of 15%.”
Du Plessis’s advice to potential investors is to first determine their investment objectives and then compare the risk-adjusted performance of funds with corresponding objectives.
Top performing equity fund category is the domestic equity resources and basic industries.
It’s a reflection of the powerful influence resource shares have on the JSE, with those funds being top performers over all time periods on the table.
For five and three years it’s the Old Mutual Mining & Resources fund, with returns of 29.4% and 14.9% respectively.
More recently, the RMB Resources fund has been pushing its way to the top and leads the rankings over one year with a return of 53.6%.
Domestic real estate property funds have also been consistent long-term performers.
Over five years it’s the Investec Property Equity fund, with 21,8%, a better return that the Alsi.
Co-manager Vuyani Bekwa says the fund’s strategy has been to consistently buy companies and listed property funds that deliver above sector average distribution growth.
“Growth from the better funds should translate into continued outperformance of the unit trust and property as an asset class,” he said.
Heading the table over three years is the Stanlib Property Income fund at 11.3%, also better than the Alsi.
The fund is also top over one year, with a return of 16.5%.
Considering the bumpy ride the equities market has been through, performance of unit trust funds is commendable.
It shows the value an active manager can add to returns.
To view the CIS Table, click here