My late grandfather was a fairly active stock-market investor when the first unit trusts were launched in South Africa in the early 1960s.
He thought they were a rather novel idea and would hand out units in domestic equity funds to his grandchildren at Christmas, telling us that, however small, they represented a piece of the local business action that we now owned.
The presents made us a bit of money and taught us something about investment, but I’m glad my grandfather isn’t around now to see how poorly local general-equity funds are performing. Frankly, I’d rather settle for a pair of socks than a slice of the local business action right now.
But that’s not fair. Many individual shares listed on the Johannesburg Stock Exchange Securities Exchange, particularly the larger companies, did reasonably well last year. The problem is this general performance was not reflected in the local equity funds many portfolio managers just didn’t get it right.
Consider the top performing funds for the last quarter of 2000, according to figures compiled by Standard & Poor’s Fund Services. The list is headed by Sage Global (also the top performing fund for the year with a return of 51,9%), followed, not surprisingly, by a number of other global and local resource funds. But there’s not one domestic general equity fund in the top 25, not for the final quarter nor for the year.
Not even for the past three years, a more reasonable time frame for an investment. It’s only on the list of the top performers for the past five years that one local general-equity fund — NIB Prime Select — makes an appearance, about halfway down the list of the top 25 funds.
The dismal performance of general equity fund managers can be measured another way.
Over the past year the All Share index lost about 2,6%. Very few general funds were able to beat that, which means only a handful of the 44 general funds registered over the period had a positive return. On average, unit trusts in the general equity sector lost about 3,2% over the period.
Fund managers will protest about the All Share being skewed towards the large mining and resource stocks, but really, if a general fund manager can’t beat the broadest measure of the local stock exchange he or she isn’t doing a good job. Investor disenchantment with this sector of the unit trust industry is starting to show. A year ago figures for the final quarter of 1999 showed 30% of gross inflows going into local equities.
The market was enjoying a strong bull run at the time, but many of the general funds missed the sharp rerating of resource shares and did not match the market’s general performance. By the middle of last year money began to move out of these funds, a R160-million net outflow in the second quarter and R800-million in the third quarter.
Now domestic equity funds capture slightly under 20% of total industry assets, while, for instance, domestic money market funds are attracting nearly 25% of industry assets. The strong support for money-market funds is a bit misleading because it’s no secret that lots of the money in these funds is from large institutions. Smaller, private investors are still eagerly putting money into rand- denominated offshore funds, but many of these have had to close because the management companies have reached their asset-swap capacity.
So where is the small investors’ money going? The strong implication is that it’s being pulled out of the unit-trust industry altogether. A year ago total unit-trust assets were near R110-billion, a total that increased steadily throughout the year to reach more than R120-billion by the end of the third quarter in September. However, by the end of last year total assets were down to R119-billion.
Now an outflow of about R1-billion against a total of R119-billion might not seem a lot, but you can bet it’s worrying the unit trust industry. The danger is that what now is a small outflow becomes a trend as investors find more productive homes for their money settling debt, paying off the bond, playing the Lotto or wherever it is the money is going.
And it’s going to take more than launching new funds and clever marketing to get this money back. Investors will want to see rewarding performance, especially from the general funds, before they start coming back to the unit-trust industry. However, there are some pockets of hope. An interesting trend coming through in the final quarter of 2000 is the strong performance by local bond funds.
Seven of the top 25 performing funds were bond funds, offering returns ranging from 9,8% (Liberty Bond) to 7% (Coronation Specialist Bond) for the quarter. Over the year the bond fund sector offered an average return of about 18,5%, not at all bad compared to the 2,6% drop in the All Share index.
This worthwhile performance could continue for some time. It’s not often you’ll find an investment writer saying nice things about government, but the rewarding yields on bonds are largely thanks to Trevor Manuel’s sound fiscal policy and Tito Mboweni’s determination to meet his inflation targets. Another potentially rewarding asset class coming through in the quarter is property, represented by the Marriott property equity fund which returned 7,3% over the quarter and 20,1% over the year.
Growing interest in listed property as an investment is apparent with Marriott launching a new global real-estate fund in the last quarter, while Coronation has also launched a new property equity fund. With money market, bond and property funds generally beating equities hands down, disenchantment with general-equity funds is likely to continue. And getting back to the socks I would rather have had for Christmas, they could be a good investment too.
One of the new international fund-of-funds launched last quarter was by Woolworths, the undisputed king of the sock market in South Africa. I do wonder, though, just how much they know about the stock market.