The unit trust industry this week toasted leading fund managers who, despite a “tumultuous” 2011 that brought a “testing” five-year period to a close, succeeded in delivering strong and often consistent returns.
The annual Raging Bull Awards ceremony was held in Cape Town to honour those who picked their way carefully through a year of extreme volatility and emerged with their long-term performance track records intact.
Continued wrangling in Europe over the debt crisis there caused two large market setbacks, while political unrest in North Africa and the Middle East, the earthquake and tsunami in Japan, and arguments about the debt ceiling in the United States also unsettled investors.
The year ended with the local equity market, as measured by the FTSE/JSE All Share index, returning a paltry 2.57 percent, according to ProfileData, while the MSCI World index returned a negative 5.27 percent in US dollar terms but a positive 13.91 percent in rand terms thanks to the rand’s weakening 18 percent against the US dollar.
Emerging markets, where many managers and investors have sought out superior returns during the credit crisis and its aftershocks in the developed world, disappointed. The MSCI Emerging Markets index ended the year 18 percent down.
Most managers agree that some major problems that plagued 2011 – principally, the problems in Europe – remain unresolved and, as a result, the volatility will continue.
Paul Stewart, the managing director of Plexus Asset Management, opened the Raging Bull Awards ceremony by saying that uncertainty is becoming part of life in this decade.
But the uncertainty is providing opportunities for managers who know their markets.
The most coveted Raging Bull Award, for the domestic management company of the year, went to Allan Gray for the fourth year in a row. The award is based on the risk-adjusted performance of all a manager’s qualifying funds for periods up to five years.
Allan Gray also won a Raging Bull Award for the performance of its domestic Bond Fund for the three-year period to the end of 2011, as well as three certificates.
Ian Liddle, Allan Gray’s chief investment officer, says the manager believes there is more value to be found in global equities than in those listed on the JSE.
As a result, almost a quarter of the Allan Gray’s asset allocation Balanced and Stable funds are now invested overseas. This gives the funds more scope to diversify their country, currency and sector exposures, he says.
The runner-up management companies of the year were Nedgroup Investments, in second place, and Coronation, in third place.
Coronation received the Raging Bull Award for the best offshore global equity fund over three years to the end of 2011. Despite the losses over the past year recorded by the emerging market index, the winning fund was the manager’s Global Emerging Markets Fund. The fund is managed by Suhail Suleman, who is upbeat about the year ahead.
Six months ago, a manager was not spoilt for choice when looking for good shares in which to invest. Now, as a result of the sell-off of shares around the world on the back of heightened uncertainty over Europe, there are a number of investment opportunities for managers, Suleman says.
Another manager who is excited about the opportunities of the year ahead is Kokkie Kooyman.
Kooyman’s SIM Global Best Ideas Feeder Fund won the Raging Bull Award for the best foreign general equity fund (rand-denominated) over three years. The fund feeds into an Irish-domiciled fund with a similar name managed by Kooyman.
He says financial shares have been oversold and are at low levels. They could do quite well, especially in the first six months of this year.
In particular, re-insurers, which had a bad year last year, could do well following significant increases in their premiums after a series of natural disasters around the world last year, Kooyman says.
Like financial shares, emerging market shares have been sold down quite a lot and could do well again this year, he says.
“Europe will be a problem and could get worse, so generally it will be good to stay away from Europe.
“We have no exposure to bank shares in Europe, and the com-panies in Europe in which we are invested are low-risk ones with a smaller percentage of their business sourced in Europe,” Kooyman says.
Kooyman thinks the US could do better than is generally expected, which will be good news for investors who pick good-quality shares there.
He is also increasing his funds’ exposure to India, while reducing exposure to China. He believes China could slow down, while India was punished too much last year and will probably grow this year.
Investec Asset Management won the Raging Bull Award for the best offshore manager of the year for the risk-adjusted performance of its funds domiciled in Luxembourg over periods up to five years.
One of the manager’s offshore funds, the Investec GSF Global Strategic Managed Fund, won a Raging Bull Award as the top-performing offshore global asset allocation fund for risk-adjusted performance over periods up to five years.
Philip Saunders, who manages the Global Strategic Managed Fund, says there is no shortage of quality opportunities amid the uncertainty.
Equity valuations are quite attractive, he says. “With the exception of some banks and financials, corporate balance sheets look quite different to those of governments.”
Saunders says the risk of a very severe recession is remote.
The macro-economic view on the US economy is quite positive, he says, and it is unlikely that Europe will derail the recovery in the US.
“Things will be relatively volatile, as some issues remain unresolved – and there will be periods when investors will be uncertain,” he says. “But you’ve got to make hay while the sun shines.”
LOWER-PERFORMING SA EQUITIES BETTER THAN CASH
Don’t expect too much from domestic equities, say leading managers of local funds, many of whom have maximised their funds’ offshore holdings.
But being in equities will give you a better chance of beating inflation, which has now risen above the rates you can generally earn from cash investments, which means that cash is trash, one of the managers says.
Domestic equities, as measured by the FTSE/JSE All Share index (Alsi), are likely in the year ahead to deliver returns below their long-term average, says Jan Mouton, the chief investment officer of PSG Asset Management and the manager of the PSG Flexible Fund. The fund won the Raging Bull Award for the best domestic asset allocation flexible fund on a risk-adjusted basis over five years.
Mouton says there are always things you cannot predict that will affect your investments, but you can sleep easy if you pick good shares and diversify across the globe.
Mouton has the PSG Flexible Fund’s offshore exposure close to its maximum allowed limit of 25 percent, and his domestic equity portfolio is very different when compared with the benchmark Alsi.
PSG also won a Raging Bull Award for its Equity Fund, the best broad-based equity fund over three years.
Shaun le Roux, the fund’s manager, says PSG takes comfort from the fact that uncertainty in financial markets always creates opportunities.
He says last year saw extraordinary out-performance by defensive shares on the JSE, such as those in the retail, tobacco and beverage sectors.
“Investors appeared willing to overpay for companies with better immediate growth prospects and higher certainty of earnings.
“We see significantly more value in sectors with a greater range of outcomes for profits and, in particular, the resource sector,” Le Roux says.
Allan Gray’s chief investment officer, Ian Liddle, says the toughest local issue facing his team is the questionable sustainability of commodity prices and mining companies’ profit margins, which are mostly substantially higher than their long-term averages.
Many commodity prices are significantly above their normal levels, which makes some mining company shares not nearly as attractive as their low price-to-earnings multiples suggest, he says.
Walter Aylett, the manager of another winning fund, the Aylett Equity Fund, says he is more excited about offshore opportunities than onshore ones. His fund won a Raging Bull as the top domestic equity fund on risk-adjusted performance up to five years.
There is a lot of pessimism, he says, and pessimism favours the buyer of shares and other securities – except in the case of housing in the United States. The big plus for this year is the US, Asia is fine and Europe will fix itself, Aylett says.
Local shares look fairly priced, and you don’t want to invest in those, Aylett says. Instead, look for shares that trade at a discount to what they are worth.
Aylett says he is worried about inflation, debt, fuel prices and the ability of consumers to spend, given that things such as rates and electricity are all higher than reported. This is not good for consumer companies.
Peter Brooke manages the Old Mutual Real Income Fund, which received the Raging Bull Award for the top domestic prudential fund on a risk-adjusted basis over five years.
Brooke says low global interest rates have made cash trash in many countries for some time, as low interest rates erode the real (after-inflation) spending power of investments. South Africa has joined the club, with accelerating inflation resulting in negative real interest rates.
Brooke expects that real returns will be hard to come by this year, as it will continue to be a low-return world. Nevertheless, equities will beat other asset classes, he says.
Over the next five years, Brooke forecasts a real return of 6.5 percent a year from local equities, 5.5 percent from property, 2.5 percent from bonds and one percent from cash. Offshore, equities are expected to deliver 6.5 percent, while bonds and cash will deliver a negative real return of one percent in US dollars. – Additional reporting by Angelique Ardé