August 2017 Update
Nervous investors who have been worrying about the low returns delivered from the JSE over the past few years will be relieved to see that the JSE continued to perform well in August adding a further +2.7%, after delivering +7.0% in July. These returns have pushed the JSE All Share Index to +10.2% over the last twelve months, +5.4% above inflation (only marginally below the long-term average real return from SA Equities).
It is interesting to note that the JSE has generated a return of 13.1% per year for the last five years while cash has generated 6.4% p.a. over the same time. This shows that while cash can appear to be a very attractive asset class over short periods when things are uncertain, it can be a serious drag on performance investment over longer periods of time.
The strong (and unexpected) returns in July and August show why it is almost impossible to predict the markets. We believe that it is better for investors to remain invested rather than trying to time markets. This view removes the need to try to forecast returns, but rather we choose to spend the majority of our time analysing opportunities with the aim of identifying investments with attractive long-term prospective risk-adjusted returns.
Digesting the News
The recent bounce in markets lifted most portfolios in absolute terms, alleviating some of the recent concern of local investors. While we do not underestimate the potential impact of investor emotion on portfolio performance, we prefer to assess what has driven returns in our strategies objectively, with the goal of ensuring that each strategy remains correctly positioned looking forward.
Below we detail our longer-term model portfolios recent returns, highlighting what the major drivers within each portfolio have been.
CWM Retirement Growth
Calender Year to date (YTD) the portfolio has delivered 9.8% and is up 8.0% over the last twelve months. This performance compares very favourably to the peer group average performance of 6.7% (YTD) and 3.9% over the last year. Since inception (November 2012), the portfolio has outperformed inflation by 4.1% and peer group by 1.2% per year. The 4.1% outperformance of the peer group over the last year is particularly rewarding as a long-term investor, as these strong returns were delivered by positions taken a number of years ago that are now bearing fruit.
The portfolio has benefited from strong manager selection with the Coronation Top 20 fund up 14.6% and the Kagiso Equity Alpha fund 11.9% (YTD).
Certain asset allocation calls have also benefitted performance, with a long-held exposure to Emerging Markets contributing significantly. The Coronation Global Emerging Markets Fund is up 26.0% YTD, and 13.0% over the last year, and the Stanlib Emerging Market Property fund up 19.3% YTD. The Allan Gray Orbis Global Equity fund (+10.5% YTD) has also performed well given its material exposure to emerging markets and lower alloction to USD denominated assets.
Also benefitting performance this year has been the long-held (and long suffering) African Equity exposure through Rudiarius which is up 13.3% YTD.
CWM Long-Term Growth
The portfolio has delivered 9.5% (YTD) and 6.1% over one year. This also compares favourably to its peer group average return of 6.0% (YTD) and 3.9% over one year. Since inception (September 2013), the portfolio has outperformed inflation by 2.1% and peer group by 0.3%. This portfolio shares a portfolio construction strategy and philosophy with the Retirement Growth Portfolio therefore all of the underlying manager returns discussed above, apply to this portfolio as well.
The key difference between the two portfolios is that the Retirement Growth strategy is limited in terms of equity and foreign exposure (due to retirement regulations) whereas the Long-Term Growth strategy is unconstrained. This has allowed this portfolio to hold more Coronation Global Emerging Market exposure which benefitted returns.
Markets in the Month
The local equity market continued its upward trend in August. The FTSE/JSE All Share Index rallied 2.7% in the month, helped by solid returns from resource shares. Interest-rate-sensitive stocks also pushed the market higher in August 2017, supported by hopes of additional monetary easing in response to a steady currency and a steep drop in domestic inflation. The Bond and Property market was up 1.0% and 0.8% respectively in August.
The rand traded marginally stronger (-0.1%) against the USD, 1.9% stronger against the British Pound and 1.3% weaker against the Euro in the month.
Impact on Our Portfolios
August was yet another good month across all local client strategies and model portfolios, driven largely by the ALSI that was up 2.7%, as well as positive returns from all other major local asset classes. The range of returns across the local CWM Model portfolios was +0.2% to +0.7% in August, with Retirement Growth and Income the best performing local strategies.
3 Year Returns (p.a.) CWM Local Model Portfolios / Foreign Strategies
The chart above shows that other than the foreign houseview funds, the local portfolio (annualised) returns remain range bound (+4.8% to +7.9% p.a.) over the last three years.
The stronger returns from growth assets recently have begun lifting the returns of the longer-term strategies (CWM Retirement Growth and CWM Flexible) relative to the more conservative strategies (CWM Income and CWM Defensive). However, returns remain below the long-term expected real returns, given the modest returns delivered by growth assets over this three year period (JSE All Share Index, +6.5% p.a.).
Looking Forward
Core Wealth Managers (CWM) aim to grow clients’ wealth over the long-term. Achieving this objective requires patience from both CWM and our clients. As investment managers we need to invest prudently within the parameters of each of our funds and portfolios, using valuations to guide a decisions. As advisors we need to ensure our clients in invested in the correct portfolio to meet their objectives, helping to guard against switching between strategies for the wrong reasons.
Our investment team continues to focus on identifying, analysing and selecting attractive long-term opportunities through a diligent research and a peer review process, which encourages independent thought and diversity of views.
Currently CWM manages 10 local model portfolio and all of them have outperformed their peer groups since their inception. We remain focused on the disciplined execution of our valuation-based investment philosophy, with preference for strategies that offer greater protection in difficult times, over flashier strategies that run hard when markets are on the upward trend. We are confident that this approach, which has proven to be successful for our patient clients since 2008, will continue to work well over the long-term.
