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SA Equity General Category

Given the nature of the investment environment, more and more investors base their financial decisions on past performance. Switching from funds that have performed poorly to the top performers in a short period may not always be a prudent strategy. Investors need to understand that short-term performance should not be the sole purpose to invest in a unit trust. To improve their chances of success they must be willing to sit through volatile markets and avoid the ‘thrill of the chase’.

In the first study conducted in the SA Multi-Asset Income and SA Multi-Asset Low Equity categories, I found evidence that buying and holding a fund managed by a quality asset manager outperformed chasing strategies over various holding periods. The second study, which focused on the SA Multi-Asset High Equity category, also showed evidence of long-term strategies outperforming short-term chasing strategies. I now move even further up the risk spectrum, looking at the SA Equity General category to test whether this conclusion still stands.

I conducted this study for the SA Equity General category for the 10 years ending 2014. I started in 2004, working through each year’s performance data, incrementally picking the best performer from the previous year and then investing for the current year, doing this over and over for 10 years. I then also implemented a two-, three-, four- and five-year holding strategy for each fund before switching to the best performer. We are therefore chasing the best past performers. I then compared each of these chasing strategies to all available funds which we could have invested in for the entire 10 year period.

This is a summary of the strategies I will be referring to in this paper:

Buy & HoldInvesting in a single fund and holding for the 10 year period
Chasing 1 Investing in the best performing fund in 2004, holding it for one year and then switching to the best performing fund at the end of the current year.
Chasing 1SInvesting in the same fund as chosen in the Buy & Hold strategy, holding it for one year and then switching to the best performing fund at the end of the current year.
Chasing 2 Investing in the best performing fund in 2004, holding it for two years and then switching to the best performing fund at the end of the second year.
Chasing 2SInvesting in the same fund as chosen in the Buy & Hold strategy, holding it for two years and then switching to the best performing fund at the end of the second year.
Chasing 3Investing in the best performing fund in 2004, holding it for three years and then switching to the best performing fund at the end of the third year.
Chasing 3SInvesting in the same fund as chosen in the Buy & Hold strategy, holding it for three years and then switching to the best performing fund at the end of the third year.
Chasing 4Investing in the best performing fund in 2004, holding it for four years and then switching to the best performing fund at the end of the fourth year.
Chasing 4SInvesting in the same fund as chosen in the Buy & Hold strategy, holding it for four years and then switching to the best performing fund at the end of the fourth year.
Chasing 5Investing in the best performing fund in 2004, holding it for five years and then switching to the best performing fund at the end of the fifth year.
Chasing 5SInvesting in the same fund as chosen in the Buy & Hold strategy, holding it for five years and then switching to the best performing fund at the end of the fifth year.

These simulations were conducted following two scenarios. The first scenario began with the best performing fund outright while the second scenario began with the same fund that was being compared to the buy and hold strategy’s value. These values were then compared to the buy and hold values to demonstrate which strategy would have given a higher return over the 10-year period.

In the SA Equity General space there were 41 funds with at least a 10-year track record that existed in 2004.

These are the funds and their annual performances in 2004:

SIM Value R 65.8%
Investec Value R 58.1%
Nedgroup Inv Growth R 58.0%
Old Mutual High Yield Opp A 58.0%
Momentum Value A 53.0%
Prudential Dividend Maximiser A 52.7%
Prudential Equity A 49.6%
PSG MM Equity FoF A 49.5%
Nedgroup Inv Rainmaker A 49.2%
Investec Equity R 48.2%
STANLIB Value A 47.8%
STANLIB Capital Growth R 45.5%
FNB Momentum Growth 44.6%
Old Mutual Growth R 44.4%
Marriott Dividend Growth R 43.8%
Old Mutual Top Companies R 43.1%
Coronation Equity R 42.9%
Old Mutual Investors R 41.0%
PSG Equity A 40.5%
Oasis General Equity D 39.0%
Element Earth Equity A 39.0%
Coronation Top 20 A 38.9%
Momentum Best Blend Multifocus FoF A 38.8%
Inv Solutions Equity FoF A 38.2%
Nedgroup Inv Core Eq A 38.2%
Old Mutual Managed Alpha Equity A 37.7%
SIM General Equity R 37.4%
Community Growth Equity 37.3%
STANLIB SA Equity R 36.8%
STANLIB MM Equity B1 36.6%
Sanlam Multi Mgd Equity FoF A 35.8%
Foord Equity R 31.5%
STANLIB Equity R 30.8%
MET General Equity 30.2%
Old Mutual SYmmETRY Equity FoF A 30.1%
Nedgroup Inv Value R 28.0%
Old Mutual Albaraka Equity 27.8%
Oasis Crescent Equity D 26.9%
Allan Gray Equity A 26.5%
STANLIB Index R 25.2%
Gryphon All Share Tracker 24.5%
Investec Managed R 37.57%
Investec Opportunity R 36.15%
SIM Balanced R 35.46%
STANLIB MM High Equity FoF B1 34.04%
Coronation Balanced Plus A 32.01%
STANLIB MM Balanced B1 31.10%
Nedgroup Inv Managed R 30.46%
Old Mutual Balanced R 29.85%
PSG Balanced A 29.71%
STANLIB MM Medium-High Equity FoF B1 28.85%
Inv Solutions MM Balanced FoF 28.78%
Oasis Balanced D 27.73%
Marriott Balanced FoF A 27.44%
Prudential Balanced A 26.86%
Momentum Best Blend Balanced FoF B1 26.54%
STANLIB Balanced B1 25.93%
Sanlam Multi Mgd Balanced FoF A 25.68%
Old Mutual SYmmETRY Balanced FoF A 25.49%
STANLIB Inflation Plus 5% A 24.00%
Allan Gray Balanced A 23.38%
Foord Balanced R 22.62%
Personal Trust Prudent FoF A 21.83%
Prescient Absolute Balanced A1 20.91%

On a qualitative basis there were at least nine funds that could have been selected to invest in for the 10-year period (Buy & Hold). For illustrative purposes of this study the Prudential Dividend Maximiser fund was selected. I then began 2005 by investing R100 000 in the SIM Value fund, as it was the best performer in 2004. In 2005, the best performing fund was the PSG Equity fund, which I then selected as my 2006 investment. I continued this same selection process for each year until the end of 2014. I compared scenarios using one-, two-, three-, four- and five-year holding periods before switching to the best performing fund in each of the chasing strategies.

By the end of the 10-year period, if we bought and held the Prudential fund, the investment would have grown to R551 121.70 @ 18.6% p.a.

Below is a summary of the Prudential fund’s accumulated 10-year value compared to each of the Chasing strategies - Which selected the best performing fund outright before switching to the best performing fund after each of the five holding periods:

Value (ZAR)Prudential/Chasing
Prudential Dividend Maximiser A 551 121.70 0%
Chasing 1 417 729.3531.9%
Chasing 2 516 033.56 6.8%
Chasing 3 502 058.06 9.8%
Chasing 4 481 970.66 14.3%
Chasing 5 558 837.52 -1.4%

The Buy & Hold strategy, using the Prudential fund, would have outperformed four out of the five chasing strategies by some healthy margins with a slight underperformance of the Chasing 5 strategy, as is indicated in the third column of the above table (Prudential fund’s accumulated 10-year value divided by each chasing strategy). On a cumulative basis however, the fund outperforms the chasing strategies extremely well.

I then compared the Prudential fund’s accumulated 10-year value to each of the chasing strategies – Where the Prudential fund was also chosen initially before switching to the best performing fund after each of the five holding periods:

Value (ZAR)Prudential/Chasing
Prudential Dividend Maximiser A​ 551 121.700%
Chasing 1S 419 903.2231.2%
Chasing 2S 565 030.52 -2.5%
Chasing 3S 508 144.698.5%
Chasing 4S 560 078.83-1.6%
Chasing 5S 619 078.47-11.0%

Here we are able to see that the Prudential fund has outperformed two of the five chasing strategies. We can see that the longer chasing strategies (4S and 5S), which outperformed the Buy & Hold strategy, held the Prudential for longer periods thus adding to their outperformance. On a cumulative basis however, the Prudential fund was able to outperform the chasing strategies.

Below I have compiled two graphs which compare each of the General Equity fund’s accumulated 10-year values against each of the chasing strategies, stacking them cumulatively.

 
Source: Morningstar and Inet

The above graph compares each fund’s buy and hold strategy to each of the chasing strategies where the best fund was selected outright, stacking them cumulatively. We are able to clearly see that buying and holding a quality asset manager’s fund will outperform chasing strategies most of the time.

 
Source: Morningstar and Inet

The above graph compares each fund’s buy and hold strategies to each of the chasing strategies, which began with the same fund as was chosen in the buy and hold strategy, stacking them cumulatively. We again see that buying and holding a quality asset manager’s fund will outperform chasing strategies most of the time.

Throughout this three part study, we have found clear evidence that investing for the long-term in unit trust funds across various SA Multi-Asset and Equity categories will almost always reward an investor more than any form of chasing strategy that attempts to chase past, short-term outperformance. The skill of a quality asset manager should be able to outperform markets over the long term.

In conclusion, we are able to see that there is undoubtedly merit in selecting a good asset manager, on a qualitative basis, and buying and holding investments for longer periods in order to achieve the best performance from an investment strategy.

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