2008 – One of the worst years ever for equity unit trusts

This year could possibly be one of the worst years ever for investors in rand-denominated domestic equity funds, according to Dr Prieur du Plessis (pictured), executive chairman of the Plexus Group.

Despite a strong rally in the equity market in recent days, only two of the 151 funds in the Domestic Equity Funds sector have posted a positive return for the year to date (31 December 2007 to 27 November 2008). “These two funds both make use of protection by selling equity derivatives against their equity positions,” says Du Plessis.

Domestic equity funds’ returns over the year vary considerably, ranging from 2,65% to -60,51%. Funds that lost the least over the year fall into the Varied Specialist Funds sector. They tend to hedge against market downside (ie protected equity funds) and they invest mainly in high dividend yielding shares. The sectorwith the second lowest loss for the yearto dateisFinancial Funds.

Value managers, especially those overweight in financial shares, struggled up to the first half of this year because of their underweight resources exposure. These managers have suddenly been vindicated as this strategy worked 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 21 November, the Resources & Basic Industries Funds – with the exception of gold funds – matched Smaller Companies Funds as the worst performers, with both sectors averaging losses of more than 42%.

”Although the FTSE/JSE All Share Index has rallied by almost 20% from its low on 20 November 2008, time is running out for 2008 not to go down in the record book as the worst year ever for domestic equity funds,” says Du Plessis.

“The market will have to rally by about another 33% before the end of the year for this scenario to change,” he says. “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 presents a good buying opportunity and the current rally is providing some welcome relief, Du Plessis believes investors should still tread with caution.

“The slowdown in global growth has still not been reflected in company earnings in South Africa. With the new reporting season approaching, there is a very real possibility of some disappointments.”

Table A

The average performance for the year to date up to 27 November 2008 for the various Domestic Equity Fund sectors:  

Graph B

The average annual returns achieved by domestic equity funds that invest across the entire market (ie General, Value and Growth Funds) since 1989: