By the start of 2017, many local investors had given up on the JSE. Not only had the market been through two-and-a-half years of very weak performance, but political uncertainty and the poor state of the local economy led many to believe that they were better off holding cash.
For the first six months of the year, they would have been right. What followed, however, was a market rally that saw the FTSE/JSE All Share Index end the year 21% higher than where it started.
As the table below shows, local equity finished the year as the top-performing asset class for South African investors in rand terms. Local property also had another strong year.
Source: Morningstar and Glacier Research
There are two key lessons for investors in this. The first is how difficult it is to time the market.
There was little, if anything, to suggest that the JSE would perform the way it did from the middle of June to the end of December. There were no market commentators suggesting that this was the time to be piling into South African stocks.
The rally was sudden and unexpected, but it was also significant. The gains were so strong that despite the poor returns of 2015 and 2016, the All Share Index delivered a three-year annualised return of 9.3% to the end of 2017. That is still below its longer-term average, but nevertheless 4% above inflation, and much better than anyone would have seen in a portfolio of only bonds or cash over that period.
Any investor who was sitting with their money in the bank would have missed this six month rally entirely, and they would be far worse off for it. This highlights how important it is to remain invested if you are looking to meet long-term goals.
The second vital lesson is how difficult it is to predict which asset class will outperform from one year to the next. Not only did no one expect local equity to be the best place to have your money in 2017, but the table above clearly shows how variable the performance of asset classes is from one year to the next.
Global property is an excellent example. For the first three years of the period it delivered excellent returns and was the best-performing asset class in both 2014 and 2015. For the two subsequent years, however, returns from global property have been negative.
Conversely, local bonds would have been the worst asset class to be invested in between 2013 and 2015. Yet it topped the list in 2016.
It is clearly no use trying to predict how an asset class will perform based on its returns from the previous year. Even within an asset class, there is huge variability.
As the table below demonstrates, even JSE sectors do not perform in a regular pattern from one year to the next. In 2016, the Top 40 underperformed all the other major indices. Last year, it was the top performer.
The variability of mid- and small-cap performance is also obvious. From outperforming the Top 40 significantly in 2014, they delivered negative returns in 2015, then outperformed again in 2016, only to fall back again last year.
This also has a significant impact on fund selection. Many investors tend to chase performance by investing in last year’s top-performing funds, but what happened in 2017 shows clearly how returns vary from one year to the next.
The table below shows the top ten funds from 2016 and how they subsequently performed in 2017:
|South African unit trust performance|
|Coronation Resources Fund||64.13%||26.33%|
|Investec Value Fund R||62.37%||-11.08%|
|Argon BCI Worldwide Flexible Fund A||46.71%||23.54%|
|Old Mutual Mining & Resources Fund R||44.43%||14.11%|
|RECM Equity Fund B||43.04%||2.43%|
|Investec Commodity Fund R||41.91%||10.13%|
|Nedgroup Investments Mining & Resources Fund R||38.40%||16.40%|
|Momentum Resources Fund A||34.62%||14.49%|
|SIM Resources Fund||32.42%||13.97%|
|Flagship IP Flexible Value Fund A1||30.92%||-5.40%|
|FTSE/JSE All Share Index||2.60%||21.00%|
In 2016 all ten of these funds substantially outperformed the market. Last year only two managed to repeat that feat.
Generally the resource funds had a fair year, but all three of the value funds that did so well in 2016 had very poor years in 2017. That is the nature of the style, and investors who understand this may be comfortable staying invested over the long term.
For anyone who is investing just because the last year was so good, however, 2017 would have unquestionably seen them taking all their money out again and putting it somewhere else. They would have effectively bought high and sold low, locking in that loss, severely damaging their long-term investment performance.