Neil Thomas
What a start to the millennium! Investment professionals’ forecasts have basically been wrong, but unit trust investors who stuck to their own views have largely been well rewarded. So scratch up one point for individual investors, nil for the investment industry.
Late last year, among much nervousness about Y2K and an accompanying shift from equities to money market funds, a few brave fund managers said the millennium bug would come to nought. How right they were. In the end it was the gung ho techno geeks who won the day, buying IT and Internet stocks, expensive then, but nowhere near the value a rampant Nasdaq would take them over the next few months.
Of course, that picture is looking decidedly different at the moment, but in the first quarter snapshot IT stocks with a strong offshore flavour were the place to be.
Top of the pops for the quarter was the Coronation International Fund of Funds, followed by Sage Internet, Old Mutual Global Technology, Sage Sci-Tech and Standard Bank European Growth. Returns ranged from 30% to 15% over the three months.
A more meaningful one-year picture has Old Mutual Global Technology at the top with an impressive return of almost 96%. The Coronation fund fills second place, having grown by 57%, with NIB Mining & Resources, Liberty Resources and Allan Gray Equity following. The last three may well represent the last spurt in the cyclical commodity upswing, a trend picked up on early by only the most astute fund managers and investors. Where the investment industry got it badly wrong at the beginning of the year was in plugging the local market, which for most average investors means a general equity unit trust fund.
Two indices show how this view became unstuck – the Morgan Stanley Capital International World Index, up by about 7,5% over the first quarter, and the Johannesburg Stock Exchange (JSE) All Share Index, down by a similar amount. The result: most local general equity funds had a negative return.
Of course, the industry will say this is simply a short-term aberration. They are probably right – few could have predicted the Nasdaq-inspired market volatility earlier this year, or the strange behaviour of Comrade Bob up north, which is according South Africa the same basket-case status as Zimbabwe.
Most fund managers say encouraging economic fundamentals remain in place for the JSE to perform well this year, as do forecasts of growth in the local market of 20% to 25%. Local general equity fund investors should probably remain where they are and hope the experts are right – the worst thing they can do now is to bail out of general equity funds.
The winners so far this year were the rand-denominated international funds, well supported by local investors who placed the bulk of net inflows offshore. It’s unlikely they were chasing performance, but rather asset diversification as many international funds reopened and new funds were launched after Minister of Finance Trevor Manuel raised unit trust companies’ asset-swap capacity in the budget.
Officially, Coronation and Old Mutual were at the top of the international performers. Unofficially, it was the Hansie Cronje It’s Just Not Cricket dollar-denominated fund. It must have earned close to 10% purely on rand depreciation since the ex- captain received the dollars, and management of the fund consisted of nothing more than sticking the notes into a cupboard.
Best of all, the dollars were invested pre-tax and forex changes, though both the Receiver and the taxman could take a different interpretation on that now that the money has been handed in (why did he do it – hand over the money, that is?) Unfortunately, the fund has been closed to further business.
Apart from negative investor perceptions towards Zimbabwe spilling over our borders, the international emerging market funds have not yet come to the party.
A recent report from Socit Gnerale says global emerging market fund managers have instead gone overweight in Mexico, Taiwan and South Korea. Old Mutual Asset Managers (United Kingdom) also expects Latin America to attract emerging market funds. Unfortunately, South Africa is the victim, partly because we are still perceived, with some justification, as being a commodity- based economy.
However, the real wobble came after the first quarter, with the United States market plunging as high-priced IT stocks were sold off. Naturally, the bad news spilled on to the JSE, debunking the myth that the local market has a low correlation to technology.
Where does that leave prospects for this quarter? Aidan Kearney, a director with the London office of Aurica Offshore Services, said the re-rating of the previously discarded “old economy” stocks funded by profit-taking from “new economy” stocks has been on the cards.
“In many ways it is akin to the bounce- back by commodity stocks this time last year, which came back from very oversold levels. Likewise, there are plenty of cheap, good companies around, with good profits and business models, bouncing back into the investment scene,” he said.
Kearney believes that despite being brutal, the correction is part of the new market “and should be seen as that. It is not the start of a secular bear market. There is too much good news on growth, inflation, corporate earnings and the interest rate cycle to suggest that.”
Similarly, Investec Guinness Flight said it remains confident about the local market and the rand, despite its recent weakness. “We are standing by our year-end figure of 11 000 points on the JSE All Share index,” said unit trusts head Jeremy Gardiner.
If Investec is right, that means the All Share will climb by around 50% by the end of the year. Investors in general equity unit trust funds will not go wrong under this scenario.
But the investor who can afford to be slightly more aggressive might consider some of the neglected and, so far, underperforming specialist equity funds. Technology funds are likely to continue being volatile, but the much-maligned financial services and small cap funds could finally make a comeback.
Good economic fundamentals, lower interest rates and the prospect of increased consumer spending must feed through to the smaller company shares. Performance has been dismal to date: top- ranked fund over the first quarter was NIB Emerging Companies, which provided a miserly return of 0,3%.
When these shares decide to move they should run hard, so investors with an appetite for risk might consider moving in now to benefit from the catch-up. The offshore funds also remain a good prospect, though don’t expect the first quarter performance to be repeated. And don’t invest offshore for short-term performance – the aim should be diversification out of our volatile emerging market.
Another sector overdue to put in a good performance is financial services, particularly the life assurance companies and some of the smaller banks. This sector should settle down once Nedcor and Standard Bank get their respective acts together and decide whether to merge or not.
Some fund managers are buying both shares on the prospect of corporate activity, and the poorly rated Absa and BOE for uptick potential if the merger does not materialise and one of these groups becomes a target instead.
It’s going to be a very interesting quarter for unit trust investors, with both the local and international markets more unpredictable than they have been for a long time. It’s even difficult trying to fathom who might win the cricket when the Proteas tour Australia later this year. Isn’t it fun being part of the real financial world again?