There is a wide difference between the returns of the best and worst performing South African equity unit trust funds over the past decade that translates into millions of rands when investment outcomes are compared, a committee of investment actuaries says.

Picking one of five lemons of the past decade would have earned you returns that failed to even keep up with inflation, essentially losing you money in real terms, the investment committee of the Actuarial Society of South Africa (ASSA) found when researching the performance of South Africa's 70 general equity unit trust funds with a 10-year track record.


A year, the difference between the best and worst equity-fund return over 10 years

Diversifying across managers using a multi-manager or fund of funds is a way to avoid ending up with the losers, but it is unlikely to earn you the returns you could earn from the top managers in the pack.

A multi=manager selects more than one manager to manage part of a fund or portfolio, typically blending those with complementary investment styles. A fund of funds selects a number of underlying funds,
typically managed by single managers.

Andrew Davison, the deputy chair of ASSA's investment committee, says a review of equity fund returns over the past decade shows that the best-performing portfolio would have grown a lump sum investment of R1m to R4.11m net of fees over the 10 years to the end of June this year. The worst-performing portfolio would have provided investors with a disappointing R1.33m after 10 years.

Davison says this equates to a disparity in performance of more than 12% a year over the 10-year period, which included the financial crisis in 2008, the recovery that followed and the more muted returns seen in recent years.

On average, over the decade equity funds returned 9.5% a year - only 4.1 percentage points above inflation for the period - and well below the expected long-term returns of inflation plus eight percentage points, Davison says.

The fortunes of local equity funds were tied to their exposure or underexposure to a single share on the JSE and Naspers, and this determined their performance relative to their benchmark indices, the all-share index and the shareholder weighted index.

Davison says Naspers comprised more than 20% of both the Alsi and the Swix over the 10 years, but most fund managers shy away from such a high concentration in a single share.

The best-performing portfolio would have grown a lump sum investment of R1m to R4.11m net of fees over the 10 years to the end of June this year

The Swix downweights shares that are not freely available in SA - for example, shares available on foreign exchanges for companies listed on more than one exchange. But Naspers shares are freely available, giving it a sizeable representation in the Swix and therefore making it a difficult benchmark for managers to beat.

Over the 10 years to the end of June the Swix returned 11.2% a year, 1.4 percentage points a year ahead of the Alsi.

Only 19 funds - all single-manager ones - beat the Swix return after fees, but almost half the 70 funds, including four multi-managers, outperformed the Alsi, Davison says.

What does this mean for you as an investor? Davison says there are three things investors should note about the returns of the past decade:

Single managers versus multi-managers

Multi-managers' funds and fund of funds have delivered returns in the middle of the range for all funds over the decade, but at lower volatility, Davison says.

Multi-managers and funds of funds returned on average 8.7% a year while single managers delivered 9.6% a year.

It appears multi-managers are not differentiated and this may be partly because they combine underlying managers and average their returns, he says.

But Fatima Vawda, founder and MD and Nadir Thokan, a portfolio manager, at multi-manager 27four, disagree.

They say although multi-managers are few and their equity funds even fewer, there is a significant difference between their best and worst returns.

Vawda says the aim of using a multi-manager is to lower the risks through diversification of manager styles and philosophies, but a multi-manager that chooses the best performing underlying managers should be able to deliver top performance.

Risk does not equate to return

Davison says investors expect higher returns for higher risk, but the equity unit trust with the highest return over the decade is
also the fund with the lowest volatility. The most volatile unit trust, on the other hand, produced a return in line with the average, he says.

However, Thokan says there is no correlation between volatility and returns within the equity funds as volatility isn't an accurate measure of risk in equities as macro-economic themes such as the commodity cycle or rand weakness affect shares.

Over the past decade the shares of a commodity producer would have a higher volatility due to the commodity market cycle and a rand-hedge industrial share (an industrial company earning profits offshore) may have a low volatility driven by weakness in the rand.

Same style does not mean similar returns

The actuaries found that managers with similar investment philosophies did not produce similar returns over time.

Vawda agrees there are good and bad managers who follow the same investment style.

She says within a particular style some choose shares largely in line with the benchmark index and with small deviations while others invest in their chosen shares without any reference to those in the benchmark index. They are benchmark agnostic, she says.

Thokan says some funds invested up to 20% of the fund offshore for the best part of the past 10 years while other funds focus solely on the South African share market as they are designed to be combined with funds with a focus on foreign markets.

A fund's allocation to foreign markets would have affected its returns drastically as the weakening rand has enhanced returns regardless of the performance of the foreign shares chosen, Thokan says.

Davison says the 10-year returns highlight the importance of choosing the right unit trust portfolio for the long term as different portfolios produce markedly different outcomes, not just in the short term but also over the longer term.

With 221 general equity unit trusts to choose from this is a daunting job for any investor, he says.