The Covid pandemic and volatile markets are causing various investors and asset owners to review their portfolios, according to Zack Bezuidenhout, Head of client coverage for S&P Dow Jones Indices SA and Sub-Saharan Africa.

“The focus will not only be on diversification, transparency and flexibility to react to unpredictable markets, but also the impact on cost. These are talking directly to some of the benefits of ETFs and Index Linked strategies,” Bezuidenhout told Africa Global Funds.

In 2019, over 68% of South African active equity funds underperformed the S&P South Africa 50, while over three- and five- year periods, 94% and 93% funds underperformed respectively.

“The same South African active equity funds fared better when compared to the broader benchmark, where 56% outperformed the S&P South Africa Domestic Shareholder Weighted (DSW) Capped Index in 2019. Large active funds in South Africa are sometimes restricted by liquidity to invest in mid and small caps,” said Bezuidenhout, commenting on the SPIVA South Africa Scorecard Year-End 2019 results.

This semiannual report tracks the performance of South African domiciled actively managed funds against their relevant S&P DJI benchmarks over the one-year period ending December 31, 2019. 

The difference in fund performance between the two aforementioned benchmarks reflected the strength of South African large-cap stocks in relation to mid and small caps.

The large-cap benchmark, the S&P South Africa 50, was up 10.4% in 2019.

It outperformed the S&P South Africa DSW Capped Index by over 3% annualized over each of the one-, three-, and five-year periods, demonstrating the tendency of the largest 50 stocks to outperform in recent years.

Local market gains in 2019 were generally buoyed by the global rally following the late 2018 selloff and were not widely viewed as a reflection of economic strength. In fact, the IMF concluded in November 2019 that South Africa faced persistently weak economic growth, deteriorating debt, and major difficulties in its state-owned enterprises.

S&P DJI’s series of factor, smart beta, and sector indices within South Africa had a disperse range of outcomes in 2019. Momentum strategies led the field in factors, with the S&P Momentum South Africa up 28.5% over the calendar year. The S&P Enhanced Value South Africa Composite Index trailed behind and was down 3.8% over the same period. The S&P South Africa DSW Materials Index posted a strong return of 32.5%, while the S&P South Africa DSW Information Technology Index lost ground and fell 10.6%. Interestingly, the S&P South Africa DSW Capped Carbon Efficient Index outperformed its benchmark by 2.6% in the year that saw the South African government introduce the Carbon Tax Act.

Over 73% of funds in the Diversified/Aggregate Bond category were unable to surpass the one-year performance of the S&P South Africa Sovereign Bond 1+ Year Index, which posted gains of over 10% in 2019. This was higher than the benchmark’s annualized five-year return of 7.7%. Over both time periods, the returns from the S&P South Africa Sovereign Bond 1+ Year Index outstripped those from the broad local equity index (S&P South Africa DSW Capped Index).

In the Short-Term Bond funds category, 92% of managers were able to outperform the South Africa Short Term Fixed Interest (STeFI) Composite. The ability of these managers to outmaneuver the benchmark persisted across the three- and five-year periods.

Bezuidenhout said: “With increased volatility and dispersion in the market, good active managers should have more opportunities to deliver outperformance, but it is yet unclear if active funds took heed of the warning signs of Covid-19 in early 2020.”

“Defensive positioning into quality stocks, or Staples, Health Care or Utilities could have provided at least some shielding from the plunges seen in the markets in recent weeks.”

“But it is possible active managers may have been stung once more by their persistent bias towards certain stocks. Value managers are likely to have felt the most pain given the alarming underperformance of these stocks relative to the broader benchmark since the start of 2020,” concluded Bezuidenhout.