I had a conversation this week about the performance of Unit Trusts (UTs) in South Africa and how it is unfathomable that Exchange Traded Funds (ETFs) could outperform UTs. UTs are actively managed, obviously they should have superior performance over an investment vehicle that simply buys and holds indices. Still, the latest (December 2018) Standard & Poor’s Indices Versus Active (SPIVA) report shows that less than 9% of UTs actually manages this seemingly easy task over a 5 year period. Patrick Cairns wrote a good article on this titled “Local active managers outperformed in 2018“.
Back in 2014 I also tried my hand at actively managing my own portfolio based on fundamental analysis. I bought only three stocks, Capitec, Calgro M3 and Peregrine (I was brave back then), and it paid off. In just over a year I sold at a return of 83%. I thought to pick the winners was the easiest thing in the world and couldn’t understand why everyone was bitching about under-performance.
I tried it again in 2018 with Woolies, Metrofile, Advtech and Santova, and got decimated. At just over 10% down, I called it quits to buy ETFs. Looking back, the net result was still positive, but it made me realise that even with weeks of research, this was not an exact science. I got lucky.
I feel for fund managers that have the constant expectation to beat the market hanging over their heads. It is difficult, the market sometimes just trips out and you won’t always get it right. They have a small army of financial advisers that need to sell these products. Usually, they can only sell products from specified suppliers. This is when you get advisers claiming their funds are the best, based on one year’s performance in 2015.
Cost of ownership
The problem with UTs is usually not the performance. The performance of a lot of the funds is similar to what the market returns and sometimes even better than ETFs. However, fees are their Achilles heel and it is near impossible to pick the winners. The cost of running these funds are much more than typically seen in ETFs. The strategies are sometimes complex and the funds try to science the hell out of them. This might mean superior performance, but almost definitely means increased trading costs.
UTs charge anywhere from 1% to 3% depending on a lot of factors like where it is invested and what the share turnover is. In comparison, ETFs charge between 0.1% and 1% to invest. Maintaining these funds are cheaper and the turnover is minimal. In a Top 40 fund, for instance, you will mostly sell of the share moving from number 40 to 41 to purchase the new share. This happens once a quarter, so no-one is in a hurry to make purchases.
Performance of ETFs and unit trusts in South Africa
According to the latest SPIVA report, the average locally invested UT returned 4.4% over the last 5 years (after fees). For those who enjoy the technical side of investing, the average performance was determined based on a market cap weighting of the different UTs in South Africa. Compared to this, the SPIVA report listed the performance of something called the South Africa DSW index at 6.34 %. It includes all the JSE shares with a market cap of $100 million and a yearly volume of $50 million.
For those of us (like me) that have no idea where to even purchase that, I will use the performance of our old trusted friend, the Top 40. The performance of the Satrix Top 40 comes in at 5.37% over the same period. This is nowhere near the long term average performance for the Satrix Top 40 of close to 14%. The sideways correction over the last 5 years has given us dismal performance.
The report also covers the performance to December 2018. Since then we have seen some growth in the market, which is not included. If you invested R5 000 per month in the Satrix top 40 for 30 years, at present performance, you would have R4.25 million.
In comparison, if you chose to put it in the average UT at 4.4%, you would have only R3.6 million. This means you would have 15.6% less at retirement after investing the same amount each month. This will probably mean retirement in Mauritius instead of the Maldives. A well-diversified portfolio will not only invest in South Africa but also include international investments. We can repeat this exercise with global data as well.
According to the SPIVA report, the global UTs achieved an average performance of 9.17% over the last 5 years. If you invested R5 000 per month in global UTs you would have saved R8.44 million. The Global 1200 gave us 12.16% over the same period (and I know where to buy this), which ensures a retirement nest egg of R14.93 million. So in global investments, UTs would have under-perform indexes by 43.5%. This is significant and would probably downgrade your retirement from Switzerland to Poland.
What do we learn from this?
If you look at the performance of some of the UTs from Coronation and Allan Gray, they are performing well. The moment you consider the after-fee performance, they start under-performing. The even bigger problem is that umbrella funds that sell you these products also take a fee. Financial advisers also charge you about 1% per year to keep you invested in these UTs. I’m not convinced they contribute enough to justify taking 25% of your performance above inflation for the rest of your life?
I would like to see UTs use the Top 40 index as a benchmark if they are selling a local high equity portfolio and the Global 1200 index if they are selling a global high equity portfolio. Can we please stop using the performance of other managers as a benchmark?
If you invest in well diversified, local and international ETFs, all data suggests that you will out-perform unit trusts in South Africa. Keep it simple and take the time to learn about investing before you start. You do not need 12 degrees in finance to outperform fund managers. The more you learn about finances, the simpler your investment strategy will become.
Be safe out there,
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