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Collective Investments
Monday, May 1, 1989
Flying high

Investors who opted for general equity unit trusts should be pleased with both the short and longer term performance posted by their management companies. Those who selected specialist or income funds have less to smile about.
A report published by the University of Pretoria’s Graduate School of Management reveals that, for the period to end December 1988, all unit trusts which have been in existence for 12 years managed to post returns well in excess of inflation.
The October 1 987 stock market crash appears to have done little to dampen investor enthusiasm and total asset value of all unit trusts was 26,4% higher at the end of 1988 compared with the previous year. The market value of unit trust investments at the end of last year clocked in at R4 386,6m - only 10,2% lower than the figure achieved just prior to the market crash.
The unit trust income index, which measures the income distributions of unit trusts, increased by 28,8% in 1988. Taking capital gain and dividend or interest income into account, general equity funds showed an average return of 25,2% for the year. Over the past five years these funds managed a compound growth rate of 19,5%. Guardbank Growth Fund was top performer in 1988 with a return of 32,33%. UAL and Sage enjoyed returns of 27,74% and 27,24% respectively and all managed to beat most JSE indices and the rate of inflation.
According to the author of the report, Hugo Lambrechts, “Guardbank Management Corporation apply a general investment policy of not investing in companies with a market capitalisation of less than R100m.
“Over the last few years, the company also invested in a very limited number of newly quoted shares. Their liquidity level since October 1987 has never been higher than 18% of the total value of the portfolio. They concentrated on the financial and industrial sectors.”
Of the newer funds, the Norwich NBS unit trust enjoyed a strong debut. In the last quarter of 1988, the fund managed to outperform all others.
MD of the fund, Louis Fourie, points out though that investors committing themselves to a regular unit trust savings programme are advised to save for at least five years.
“It is only for this period of time that the full effect of rand cost averaging can be appreciated,” he says.
The specialist equity funds, which tend to concentrate on mining related stocks, did not fare nearly as well. On average, these unit trusts showed a return of 10,6% in 1988. Even at this level, however, most specialist funds managed to perform better than comparable JSE indices.
Mr Lambrechts explains, “A great disappointment during 1988 was the performance of the gold price. The JSE gold index dropped by 22,16% and there is pessimism regarding prospects for the gold price in 1989.”
Guardbank did, however, manage to prove that the gold price obstacle could be overcome. This fund delivered a return of 22,76% by concentrating on diamonds, platinum and non-precious metals.
Two other specialist funds which managed to perform well were Sanlam Industrial Trust and Sanlam Index Trust. Mr Lambrechts notes, “The two unit trusts have, in fact, performed best of all the specialist funds, almost without exception, over the past 12 years.”
He finds the performance of these funds understandable and outlines his reasons. “South Africa has a long-term inflation problem. The rise in the prices of consumer goods are simply passed on to the consumer. “There is reasonably little competition in the local business sector, while the consumer quite simply just pays without complaining too much. Price increases mean that company profits will at least keep pace with inflation.”
The report regards industrial companies as one of the few really effective investment alternatives over the longer term but does not rule out another early correction in share prices.
The stock market crash together with firmer interest rates saw the asset level of income funds climb by 20,6% in 1988 to R219,7m. The seven funds represent the investments of some 8 028 unit holders. However, only the Standard Bank Income Fund has managed to post an inflation-beating return over the past three years. Over longer periods all income funds have fared badly when compared with inflation. “Income funds as an investment alternative do have merit when general equity investments do not fare well. But when unit prices start rising again, the income funds hardly stand a chance to take up more than a modest part of the total unit trust portfolio.
“Their returns over a longer period simply do not justify it,” says Mr Lambrechts. On the other side, the return offered by income funds has historically been much less volatile than their equity based counterparts. In terms of the place of unit trusts in an investment strategy, Mr Lambrechts offers the following, “We must accept that fund managers will not get it right every time in the short-term. The best we can hope for is that they get it right over the longer term and defend our savings against the debilitating effects of inflation.
“However, we should not be naïve and expect unit trusts always to be a safe investment alternative. There is a risk attached to unit trust investments. The rewards, however, seem to outweigh these risks, especially with regular investments over the longer term.
“Alternative investments, be they in gilts, debentures, fixed deposits, participation mortgage bonds, building society shares or any savings account, have much less uncertainty attached to them - they will lose against inflation.”

Copyright © Insurance Times and Investments® Vol:2.5 1st May, 1989
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