The S&P Indices Versus Active (Spiva) scorecard is usually time for great smugness among index managers. Over the five years to June 2021, for example, 93% of SA equity funds failed to beat the S&P 50, admittedly a rarely used benchmark, while 92% of global equity funds available in rand failed to beat the S&P Global 1,200 and 76% of bond funds failed to beat the SA Sovereign Bond Index.
But is this going to be a permanent underperformance? In SA choosing the right equity benchmark is an active decision, and over the past six months a small majority of funds, 51%, have been able to beat the most commonly used benchmark, the capped shareholder weighted index (Capped Swix).
As Coronation chief investment office Karl Leinberger puts it, in an SA market where four shares often make up at least 40% of the market, the index presents considerable stock-specific risk. The first index fund, designed by Vanguard’s Jack Bogle, tracked the S&P 500, in which it was unusual for any share to represent more than 2% of the universe. His catchphrase was not to look for the needle in the haystack, but to buy the haystack (though not necessarily the Heystek).
Index funds do not lend themselves well to concentrated markets such as SA’s. Just look at how the Chinese clampdown on big tech affected Naspers and Prosus, or how the 40% fall in iron-ore prices affected BHP. Smaller general equity funds such as Kagiso and Denker were able to exploit the huge fall in small and mid caps in March 2020. Over the past 12 months small caps have recovered 70% and mid caps 40%, while the all share index (Alsi) is up about 22%.
Leinberger says the main weakness of index funds is that they cannot be used effectively in asset allocation. In theory investors might be happy with a fixed 60% equity, 40% bond allocation. That would not have been a bad call over the past five years, when the all bond index, at 9.6% a year, gave a better return than the Alsi’s 8.3%. But Leinberger believes that might not be a responsible stance over the next five years, when there is a real risk of government default in SA and in which yields internationally remain negligible. Global government bonds are already a dud investment, having provided just a 1.6% annual return in rand over the past five years.
Just as the Spiva report was released an internet newsletter published a piece by British multimanager Simon Evan-Cook: “Why passive zealots really wind me up.” He points out that the UK general equity funds, with an average 135.9% total return over 10 years, have outperformed the market’s 109.6% return. This has happened because, unlike SA, investing in domestic-only funds is a rarity in Britain these days. In fact, these funds own just 2.4% of the shares on the London Stock Exchange.
They can be niched, nimble and have no need to behave as closet index trackers. It’s not hard to beat the market, provided you don’t do something stupid, he argues. I am not sure I agree. Beating the market is not like auditing a set of accounts, which anyone with enough experience and basic competence can be relied on to complete successfully. Luck plays a far greater part in investment management.
But in SA there are a handful of managers that have proved they can add value — not month in, month out, but over the long term. They include Ninety One, Coronation, Allan Gray, Foord and Prudential (soon to be M&G). There has been little take-up in pension funds of passive options when these managers have been the alternative. Branding and marketing play their part, of course, but I would still like to see a competitive balanced index product.
There are two neglected balanced funds under the Absa NewFunds banner, but they have been poorly marketed. The more aggressive MAPPS Growth portfolio has given a 9.1% return, respectable against the 10.1% from the 1nvest Swix top 40 tracker. The more conservative MAPPS Protect’s 7.7% has not kept up with a top performer in the low-equity category such as the Nedgroup Stable Fund (up 9.2% a year) but it would still have been a sensible place to keep money at low risk.
Now that the Absa exchange traded funds will be moving over to Satrix in the Sanlam stable, the marketing will become more professional and aggressive. The biggest prize for Satrix from the Absa NewFunds takeover will be its R2bn plus Govi, which tracks SA government bonds. It is particularly hard for active managers to outperform the bond index.
And Satrix will be bringing on board a mixed bag of smart beta funds. Some of these are so similar to the existing Satrix funds it seems hardly worth keeping two funds going. For example, the Research Affiliates Fundamental Index (Rafi) — probably the strongest brand in the smart beta sector, focuses on the economic footprint of shares. To all but the most pedantic academics the NewFunds Global Intrinsic Value Index tries to do exactly the same.
But in some cases the label may be the same but the outcome is different. Momentum should be an easy style to define: chasing expensive shares expecting them to get even pricier. But over two years the NewFunds version has given a 10.3% return, Satrix 7.5%. So much for getting exactly what it says on the tin.
There has been little demand for the NewFunds Volatility Managed Funds, and it is hard to blame financial advisers for avoiding them. All three of these funds are at least nine percentage points behind the 14% achieved by the Alsi on an annualised basis over the past two years. A good example of overcomplicating the simple field of index funds.
• Cranston is a Financial Mail associate editor.
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