One of the worst years for equity funds

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2008 could possibly be one of the worst years ever for investors in rand-denominated domestic equity funds.

Despite a strong rally in the equity market over the past few days, an analysis of the performance of unit trusts categorised under the various Association of Collective Investments (ACI) sectors for Domestic Equity Funds shows that for the year to date (1 January to 27 November 2008) only two funds out of the 151 in existence has managed to post a figure in the black.

The two funds that managed to eke out a positive return – Peregrine Protected Equity Fund (+2.7%) and RMB Protected Dividend Fund (+2.1%) – are both funds that make use of protection by selling equity derivatives against their equity positions.

The returns achieved by domestic equity funds over the year vary considerably, ranging from +2,7% to -60,5%. Funds that lost the least over the year are funds that fall under the sector for Varied Specialist Funds. These tend to be funds that hedge against market downside (i.e. protected equity funds) and funds that invest mainly in high dividend yielding shares. The sector that shows the second lowest loss for the year to date is Financial Funds.

Value managers (especially those overweight in financial shares), who struggled up to the fist half of this year because of their underweight resources exposure, have suddenly been vindicated as this strategy has once again proven to work well during the market carnage experienced over the last three months.

In general, funds that bore the brunt of the bear market this year were Smaller Companies Funds and Growth Funds. Before the market started rallying on Friday, 21 November, the Resources & Basic Industries Funds (with the exception of gold funds) were matching Smaller Companies Funds as the worst performers, with both sectors averaging losses of just more than 42%.

The average performance for the year to date for the various ACI Domestic Equity sectors is shown in the table below.


Source: Plexus Asset Management (based on data from MoneyMate).

Although the FTSE/JSE All Share Index has rallied by almost 20% from its low on 20 November 2008, the fact of the matter is that time is running out for 2008 not to go down in the record book as the worst ever for domestic equity funds. The accompanying Graph B shows the average annual returns achieved by domestic equity funds that invest across the entire market (i.e. General, Value and Growth Funds) since 1989.


Source: Plexus Asset Management (based on data from Profile Data and I-Net Bridge).

The figures show that the market will have to rally by about another 33% before the end of the year for this scenario to change. With the current pessimistic mood surrounding the global economy and financial markets in general, it would take a brave person to bet on any other outcome.

Although the sharp decline in equity prices has presented a good buying opportunity and the current rally is providing some very welcome relief, I believe investors should still tread with caution. The slowdown in global economic growth has still not been fully reflected in company earnings in South Africa, and earnings reports over the next few months could bring some disappointments.


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