Overview of unit trust returns for the quarter ended 30 September 2010

After suffering the worst quarter in eight years, mature-market equities had their best quarter in more than 23 years. This can be ascribed to the debt crisis in the European Union appearing less troublesome than initially feared and concerns of an imminent implosion of China’s real estate market being allayed, says Dr Prieur du Plessis, Plexus Group chairman and author of the Investment Postcards blog. The MSCI World Index returned 13,2% in US dollar terms, nearly wiping out the losses in the previous quarter.

Emerging-market equities, as measured by the MSCI Emerging Market Free Index, continued to outperform their peers in mature markets and notched up a 17,2% gain after losing 9,1% in US dollar terms in the previous quarter.

“Global investors cheered South Africa’s success in hosting the FIFA World Cup as the FTSE/JSE All Share Index massively outgained the other markets by ending the quarter 24,9% higher in US dollars, dividends and income reinvested,” says Du Plessis. Financials and industrials were the darlings, returning 30,6% and 26,9% respectively.

Du Plessis points out that much of the returns in US dollars can be attributed to the rand strengthening by 10,2% against the dollar. “It is clear that the impact of the World Cup on the South African financial markets was vast,” he says.

While local investors on the South African bourse had slightly less to cheer about than their US counterparts, the return on the FTSE/JSE All Share Index of 13,3% in rand terms more than wiped out the previous quarter’s loss of -8,2%. South Africa is also a star performer on a one-year basis, returning 30,8% in US dollar terms compared to a paltry 4,6% for the MSCI World Index and 17,7% for the MSCI Emerging Market Free Index. In rand terms the FTSE/JSE All Share Index yielded a total return of 21,1% for the year.

“Despite rising commodity prices the FTSE/JSE Resources Index lost out significantly due to the rand’s strength,” says Du Plessis. In rand terms, the Resources Index returned 7,1% for the quarter while the FTSE/JSE SA Industrial Index and the Financial Index returned 18,5% and 15,2% respectively. On a one-year basis the SA Industrial Index and the Financial Index also beat the 12,5% of Resources hands down with 28,2% and 24,3% respectively.

According to Du Plessis, the positive sentiment also flowed over to the South African bond market. “The BESA All Bond Index returned 19,1% in US dollar terms – more than double the JP Morgan Global Government Bond Index’s 8,0%,” says Du Plessis. In local currency terms the return on the BESA All Bond Index was 8,0% over the quarter and 15,3% over the past year, income reinvested.

Du Plessis points out that if it is assumed that without the World Cup the FTSE/JSE All Share Index would have mirrored the 17,2% return on the MSCI Emerging Market Free Index in US dollar terms, the excess return as a result of the World Cup would be 7,7%. “That equates to a return of $36,55 billion or R254 billion at the end of the September quarter, which is nothing to be ashamed of!”

The collective investment schemes subcategories that performed the best during the last quarter were the Domestic – Equity – Industrial and Domestic – Equity – Large Cap sectors with 16,0% and 12,9% respectively.

The worst subcategory for this period was the Foreign – Fixed Interest – Varied Specialist category with minus 4,3%.

The 12-month charts are topped by the Domestic – Real Estate – General and Domestic – Equity – Financial Category with 24,8% and 23,2% respectively.

Over three years the Domestic – Fixed Interest – Bond category was first with 9,9% per annum, with Foreign – Equity – Varied Specialist being the worst with -9,7%.

The Domestic – Real Estate – General category performed the best over the past five years with 16,9% p.a.

The best four domestic funds over the last quarter were all industrial funds. The best of these were the Old Mutual Industrial Fund and the STANLIB Industrial Fund with 18,4% and 16,5% respectively. The worst fund over this period was the Sanlam International Equity Fund of Funds with -25,0%.

The fund that performed the best over the past 12 months was the 36One Flexible Opportunity Fund with 31,3%.

The three-year chart is topped by the Cadiz Equity Ladder Fund with 15,0% p.a. The best fund over the past five years was the Investec Property Equity Fund A with 20,0% per annum.

According to Du Plessis, the extremely strong returns from stock markets over the past quarter surprised most investment managers. “While equities appear to be overbought in the short term and there are still risks to the global economic recovery, history has shown that in a low interest rate environment equities normally outperform other asset classes,” says Du Plessis.

His advice to clients is to maintain equity exposure in a balanced portfolio at a level that feels comfortable for their specific risk appetite. “However, investors with a long-term time horizon (more than ten years) and who can stomach volatility should continue to favour equity funds that have more than 75% exposure to equities.”