It could take fund managers considerable time to lure investors back to the domestic unit trust market after its poor performance over the past six months
Neil Thomas
The daggers are out for fund managers as another set of quarterly unit trust results show how poorly many local funds have performed. Investors should be annoyed, particularly the typical small investor who puts his few hundred bucks a month into a domestic general equity fund, the sector with the largest number of funds in the industry. Over the past three years, the minimum reasonable time frame for a unit-trust investment, very few of these funds have been able to beat the meagre 6,3% increase in the JSE Securities Exchange all share index.
But the barrage of criticism aimed at fund managers over the past couple of weeks is a little misplaced. The writing was on the wall for local general equity funds at least six months ago, so bashing the managers now is stating the case after the event. The Mail & Guardian told its readers at the beginning of the year, not too subtly, that “Fund managers f*@#! up”.
It will take time for the survivors to dig themselves out of the hole they are in, hamstrung by low liquidity on the JSE Securities Exchange and some lines of stocks they simply can’t sell. Don’t be too hard on fund managers now they might leave the industry and sell life insurance or motor cars instead, then we’re really in trouble.
Besides, investor anger and razor-edged missives in the press are nothing compared to the angst they must be feeling as they watch money leave the industry.
The first nine months of last year were halcyon days for the unit trust industry. Emerging market shocks had subsided, Wall Street was running strongly and money flowed into the industry. At the beginning of last year total industry assets were touching R110-billion, growing steadily through the year to reach R120-billion by the end of the third quarter.
Then the trend reversed, inauspiciously at first as the year ended with R119-billion in total assets.
Now, according to figures from Standard & Poor’s Fund Services, industry assets stand at R117-billion. The outflow is growing, and you can bet it’s causing unit trust management companies sleepless nights.
The numbers are probably distorted by less money from institutions being washed around money market funds, still the largest sector of the unit trust industry claiming more than a quarter of total assets. But part of that outflow is also small investors voting with their feet, deciding that there are more productive homes for their investment money.
It could take considerable time for the industry to lure that money back, and, worse, the growing outflow confirms little new money is going into unit trusts. So spare a thought for your fund manager as you cancel your debit order and look for greener pastures hey, it’s not easy having to trade down a 4×4 or Z3 for a more modest Toyota sedan.
However, if you haven’t sold your units, now is not the time to do so. Investors in a really badly performing fund will take a loss if they sell now. Console yourself with the voodoo economics antithesis of physics that says what comes down must go up, and at least the money you invest every month is buying more units than it did before.
There are also a number of funds that continue to perform well and provide investors with top returns. Just look at the much-maligned domestic general equity sector. Not only has it not kept up with the all share index, but the average return over three years is a dismal negative 2,2%.
But even here there are pockets of value. Over the same period the Brait Accelerated Growth, Investec Index and NIB Prime Select funds all grew your money by more than 20%. How do you choose the winning funds? There’s no easy answer apart from doing some research and finding a fund that matches your market outlook phone the fund manager if necessary.
But a useful, though not infallible, rule of thumb is to confine your selection to those funds that consistently appear in the top quartile. They might seldom be first, but if they hover consistently around the top 10 of the domestic general equity sector it’s a good guide.
Looking at the first quarter of this year, and remembering that three month’s performance is no indication of longer-term value, at least top-placed Futuregrowth Pure Equity in the “other theme” sector showed that money can still be made from unit trusts. It returned 15,2% over the quarter, not shabby in anybody’s book.
Top prize for consistency, though, goes to the Liberty Resources fund run by Ian Woodley. Resources have been the good news story for the past three years, though many investors and non-resource fund managers missed the beginning of the run. However the Liberty fund is the top performing unit trust over one year, offering a return of 56%, over three years (231%), seven years (280%) and over 10 years (585%).
Resources are cyclical and timing is important, as is the time frame of the reporting periods, but this remains a celestial long-term performance from a unit trust.
Another good performing fund gaining a record for consistency is the Investec Value Fund. It was placed second over the quarter (11,9%) and is 16th over the past month (not that that means much).
Fund manager John Biccard says there are only 30 shares in the portfolio, and these tend to be tightly focused on special situations. A fund like this requires a lot of active management, but under present volatile stock market conditions it looks like an approach that could pay off.
Rand-denominated foreign funds remain popular, though the local market has been beating them recently, and should continue as the United States decides whether it is heading for a hard or soft landing. But many of these rand funds are closed already and the rest should be capped soon after the scraping of the asset-swap mechanism in the last budget. Minister of Finance Trevor Manuel is not the unit trust industry’s favourite politician at the moment.
So the market remains tough, and choosing the right fund manager seems as important as selecting the right asset class. Fixed income funds will remain a safe bet for a while, particularly bond funds as Tito Mboweni lines up his sights to meet inflation targets by the end of next year.
However, the cowboys out there who don’t cry at tough markets and have some money to spare should perhaps start looking at tech, Internet and small capitalisation funds. These are presently the polecats of the industry, but despite the smell they are going very cheap. And there seems little doubt the downgrading of tech and small cap stocks has been overdone. On a two- or three-year view this could be where the future money is.