Seeking a listing: Before it can join the JSE, Nova Properties must deal with resistance from debenture holders, who allege its directors awarded themselves a hefty stake by sleight of hand. Picture: REUTERS
Seeking a listing: Before it can join the JSE, Nova Properties must deal with resistance from debenture holders, who allege its directors awarded themselves a hefty stake by sleight of hand. Picture: REUTERS

Last year ended with most investors despairing at their returns, but fortunes have improved greatly in just three months.

Between January 1 and March 31, shares measured by the JSE all share index (Alsi) returned almost 8% and global markets measured by the MSCI all countries world index returned 12.6%.

Local bond investors got a healthy 3.8% from the all bond index and global bond investors 2% from the FTSE world global bond index, Morningstar reports.

These are the benchmarks for popular unit trust funds and for asset classes that dominate multi-asset funds used by many South Africans for their retirement savings.

Morningstar data shows that the more than 350 funds in the most popular multi-asset class, the multi-asset high equity sub-category, returned on average 5.83% for the past quarter — compared to the -4.4% they earned for the quarter to end-December.

The past quarter's returns have lifted one-year returns for these funds to an average of 5.92% (-3.39% last quarter) and five-year annual returns to 5.77% (5.07% last quarter).

It's an improvement, but you are still lagging behind the typical target for these funds of inflation plus 5%, and still trailing investors in money market (7.17% a year for the past five years) and income funds (7.58% a year for the past five years).

Pieter Koekemoer, head of personal investments at Coronation, says though we are still in a crisis of returns, the past quarter's recovery should remind you to stick to your long-term investment plan.

He says that when bad news makes you feel bad, it is often already in the price of your investments and explains your poor returns. You now need to consider what will drive future returns, he says. The drivers for many JSE-listed companies that derive much of their profits offshore are different from those that rely on the local economy.

Murray Winckler, co-founder and portfolio manager at Laurium, told the recent Collaborative Exchange Investment Forums for financial advisers in Cape Town and Johannesburg that of the companies represented in the Alsi, only 34% are exposed to the local economy, 23% to emerging markets outside of SA and 36% to other developed markets.

Koekemoer says last year was unusual in that many JSE-listed global businesses such as British American Tobacco, MTN, AB InBev and Naspers got into trouble for their own reasons, leading to sharp share price falls.

As a result, shares making up almost half of the JSE started this year a lot cheaper, with room to improve, without being dependent on the local economy.

Coronation is now reducing exposure to shares of companies focused on the local economy, the so-called "SA Inc" shares.

Not all managers are doing the same. At the Investment Forums, Gavin Wood, chief investment officer at Kagiso Asset Management, said Kagiso is finding exciting value in mid-cap shares with a market capitalisation of less than R15bn.

Wood says the prices of mid-cap shares have fallen so much over the past three years that they now present a once-in-a-lifetime investment opportunity. They are not well-researched by managers because they are not included in benchmark indices.

Shaun le Roux, portfolio manager at PSG Asset Management, told the forums PSG is also seeing better opportunities in these shares than in larger ones and the premium for investing in these less-liquid, smaller shares relative to larger ones is as wide as one ever sees it.

Le Roux says PSG is seeing valuations (prices relative to earnings) that it last saw in the bear markets of 2003 and 2008, and it doesn't require a booming economy to attract investors.

Winckler says "SA Inc" shares are the cheapest they have been for seven years and as long as earnings look good for the next 18 months, a rerating of prices is all that is required to deliver returns.

Jacques Plaut, portfolio manager at Allan Gray, doesn't agree. Though he admits that the size of the investments it manages means Allan Gray is confined to investing in larger shares, the manager isn't finding shares trading at large discounts and believes smaller companies are prone to bad governance and becoming overvalued in bull markets.

Rob Spanjaard, chief investment officer at Rezco, told the conference that the local market is likely to be range-bound - swinging between a narrow range of prices - for some time and investors will need managers who can pick the shares of companies that will really work for them.

Brian Thomas, a co-portfolio manager at Laurium, ventured that the local equity market could deliver 18% for 2019, with a good portion already delivered in the first quarter.

Thomas says one should remember that the local market has delivered positive after-inflation, or real, returns 65% of the time since 1999, and annual returns for every five-year period since 2003 have been positive.

He says despite the gloom about SA over the past 10 years, the Alsi has given you 13.3% a year, but companies in the Alsi that do not have substantial offshore earnings have also delivered 16.2% a year for a decade.

Though managers may not agree on where to find returns in the year ahead, Koekemoer says many rely on the valuations of shares - the price relative to the expected earnings and cash flows - and what those valuations have been historically.

Current valuations show that for share prices to get much worse, conditions would need to deteriorate rather than for the economy to just plod along, he says.

It is therefore very unlikely that you will see a repeat of the very disappointing returns of the past five years over the next five years, even if everything doesn't go right, Koekemoer says.