Many unit trust investors have suffered a bruising attrition of wealth over the past two years, and it may take years to get back to ground zero.
The average domestic equity fund is hovering only slightly above its level in early 2000, according to the Profile All Domestic Equity Fund Index (Padefi). The 29% gain in the ALSI 40 index since April this year restored some respectability to investor balance sheets, but this is still not enough to counter the effects of inflation over the past three years.
Looming over the performance tables is the curious career of the rand, which took a 37% drubbing in 2001, but has gained 33% since January last year. Rand hedge funds dominated the performance rankings last year, but were nowhere to be seen in the September 2003 tables.
Those who put their faith in the virility of the rand at the beginning of the year were well rewarded. The top performing funds over the past 12 months were all Proudly South African, with little or no exposure to rand hedges.
Funds that took a bet on the rand strengthening and interest rates dropping scored a double whammy. Calling interest rates lower was a no brainer, but most fund managers expected this to be accompanied by a weaker rand as foreign money was supposed to fly off in search of some other honey pot offering more attractive returns. This didn’t happen.
Resources stocks and those with an export bias have been pulverised by a rand that broke through R7 to the dollar last month. Writing in his latest Turning Point newsletter, cycle analyst Victor Hugo — who earlier this year correctly called the rand to current levels — sees scope for the rand to continue strengthening to between R5,95 and R4,54 within two years.
“For the first time in at least 13 years (the rand was at R2,50 in 1990), South Africans are experiencing the hugely positive prospect of building real wealth in global terms. During these 13 years we had to put up with working a treadmill going nowhere — trying to build assets depreciating in global terms — as inflation and a weaker currency created their illusion of growth. At last the share price of South Africa is on a recovery route,” writes Hugo.
Another reason to go with a Proudly South African fund — apart from the likelihood of the rand remaining strong — is that local stocks are still cheap relative to foreign ones.
The top performer over the year to September was Nedbank Entrepreneur with a return of 26,9%, followed by Sanlam Select with 25,2%. Behind these two came a slew of income and bond funds with returns of between 20% and 23%, all of them riding the interest rate wave down.
Not surprisingly, the bottom of the one year table is crowded with rand hedges, notably international, resources and ALSI 40 tracker funds, where returns ranged from -25% to -39%.
Small cap funds staged a surprising turnaround over the past year, and many resources stocks were held aloft by rising dollar commodity prices. Even a small reversal in the rand’s strength will have a positive effect on their share prices.
Over the three years to September, the performance tables favour gold, resources and value funds. Old Mutual Gold and Standard Bank Gold, South Africa’s only two pure gold funds, were runaway winners with annualised returns of 39,3% and 34,6%. Both funds lost ground over the past 12 months, but could stage a mighty recovery if the dollar continues to weaken.
Third placed was Investec Value with an annualised return of 31,5%. Investec Value and Sanlam Select achieved high returns at very low risk for investors, according to the latest Risk Adjusted Performance Unit Trust Survey from Advanced Portfolio Technologies. This survey, which measures fund performance against 20 categories of risk, is based on a star system that awards five stars to funds achieving high growth at low risk and, at the other end, zero stars to funds with low growth at high risk. Investors who stick with five-star funds have beaten the market average by a wide margin over the past two years.
Investec Value’s fund manager John Biccard says there’s still room for growth in South African equity prices over the next year, barring a major offshore collapse that would drag South African stocks down. The fund has a low exposure to rand-sensitive stocks and includes Reunert, Rainbow Chicken, RMB, Truworths, Standard Bank, African Bank, Mr Price, Rebserv and Gold Fields. It recently loaded up on Nampak, Investec, Apex B Property units, Primedia and Iliad.
Construction and retail are two sectors high on the buying list of the top performers over the past year. Sanlam Select has a 14% exposure to construction stocks and expects this sector to benefit from a revival in fixed investment, particularly from the public sector involvement in projects such as Gautrain and Coega in the Eastern Cape. The construction industry has yet to peak, as the fixed investment cycle is only now emerging from a slump. Earlier this year construction wasn’t such a sure bet: “The Minerals Bill coupled with the strong rand delayed many construction projects, but the drop in interest rates started to stimulate construction activity again,” says Sanlam Select manager Ricco Friederich, who correctly anticipated a stronger rand at the beginning of the year.
Both Friederich and Nedbank Entrepreneur fund manager Alistair Lea are bullish on shares such as Group 5, whose share price rose nearly 70% in recent months following an R80-million turnaround in its manufacturing division.
Nedbank Entrepreneur is a relatively small fund with R58-million under management but will soon be merged with FT/NIB Emerging Companies and BOE Emerging Focus to create a R145-million fund as part of the Nedcor group restructuring.
The fund’s stable of winners included Wilson Bayly Homes, Uniserv, Group 5, Pepkor, Ellerine, Anglovaal Industries, Foschini, Hudaco and Nuworld. Despite an excellent year, Lea says the average price-earnings ratio of the fund, at 8,5, is still well shy of the ALSI 40’s 11,5.
Nedbank Entrepreneur invests in small and medium-sized companies, now enjoying a resurgence in popularity after exploding in the faces of investors five years ago. Back then, small cap stocks, some of them with hardly any profit history, traded at price earnings as high as 20 before the bubble burst.
Lea says the fund’s performance is largely due to avoiding calamities. Virtually all stocks in the portfolio registered healthy growth, a credit to the management team’s stock picking ability. The fund has a sizable exposure to construction and interest rate-sensitive stocks.
The message for investors looking for value over the next six to 12 months: don’t count on any serious weakening in the rand and try a dose of Proudly South African. Buy gold on the dips, according to Hugo and technical analyst Clive Roffey, and hang on for the ride of your life.
Top 25 domestic unit trusts one year to September 30 2003
1 Nedbank Entrepreneur 26,87
2 Sanlam Select 25,16
3 Investec Opportunity Income ‒ A 23,73
4 Liberty Bond ‒ B1 23,37
5 Investec Gilt ‒ A 22,33
6 Futuregrowth Bond 21,86
7 Absa Bond 21,83
8 Prudential High Yield Bond 21,59
9 RMB Gilt 21,55
10 Investment Solutions Pure Fixed Interest 21,26
11 Community Gilt 21,24
12 African Harvest Bond 21,22
13 Old Mutual Small Companies ‒ R 21,20
14 Old Mutual Gilt 21,10
15 Absa Specialist Growth 20,32
16 Sanlam Gilt 20,21
17 Investec Value ‒ A 20,06
18 Sage Gilt 19,87
19 Standard Bank Science & Technology ‒ A 19,84
20 Standard Bank Gilt ‒ R 19,51
21 BoE Bond 19,51
22 Metropolitan Gilt 19,44
23 FT NIB Emerging Companies 19,36
24 Standard Bank Property Income ‒ A 18,77
25 Investec Emerging Companies ‒ A 18,60