The army of chartered financial analysts, as much slaves to their textbooks as any follower of Karl Marx, will be bemused by the markets in 2018. According to their set texts, higher risk should mean higher return. Yet unless there is a dramatic recovery in the JSE by midyear, the five-year nominal equity returns will be zero.
That might not sound too bad until we’re reminded that in real terms that is a capital loss of 5% a year or 23% cumulatively. It would be human nature to think it can only get worse, and to hide for safety in cash and even bonds. They undoubtedly have a role to play in any portfolio but the long-term case for equities is strong, unless political circumstances make shares worthless, such as Cuban assets in the 1950s, Russian shares before the revolution or German shares going into the 1930s. So far it looks like financial markets still have a place in the SA developmental state.
Coronation’s unit trusts are a good proxy for the risk curve as they are made up of clearly demarcated asset mixes. Strategic Income, with no equities, was the best performer. The return from the rest of the funds was determined by their equity exposure, from the conservative Balanced Defensive to Capital Plus and Balanced Plus and then the dedicated Equity fund and the Top 20 fund. Coronation didn’t do itself any favours with some aggressive positions in dogs such as MTN, British American Tobacco and Intu.
To be fair to Coronation, it rolled out its big guns to explain its position to investors in Summer Place in Hyde Park. Chief investment officer Karl Leinberger says Coronation through its 25-year history has underperformed in one year in three. He says the house philosophy is to own growth assets when they are cheap, which often means missing a party such as the popularity of resources shares in 2007/2008 or construction shares prior to the 2010 Soccer World Cup. Investors who left Coronation after a bout of weakness have often lived to regret it, as outperformance has tended to follow.
It is not surprising that some people are considering switching to index funds
History doesn’t always repeat itself. When a firm as reputable as Coronation seems to follow an own goal by slipping on a banana skin, it is not surprising that some people are considering switching to index funds. Leinberger says (though of course he would) that SA is lucky to have several managers with multidecade track records of outperformance. As well as Coronation, financial advisers can also consider Allan Gray, Investec, Foord and Prudential; in the US and UK such performances are thinner on the ground, especially in multi-asset funds.
An active decision
He he makes the point that the SA market is too concentrated for passive management. Naspers accounts for 27% of the market, and it had a poor year. Resilient and Steinhoff were also large index constituents.
And of course, there is no such thing as a passive asset allocation decision; it is an active decision even to choose the most common balanced fund default — 60% equities and 40% bonds.
Co-portfolio manager Adrian Zetler says many shares on the JSE now look cheap. The risks from Brexit to UK-based assets is material but Coronation is a heavy holder of Quilter, formerly Old Mutual Wealth UK, a successful wealth management and investment platform business. It will be a cautious buyer of UK property shares Intu and Hammerson. The firm has invested in SA defensive shares such as Netcare and Life Healthcare, down 35% from their peak, as well as Shoprite.
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