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Investors experienced an uneasy first quarter of the year as global risk assets came under pressure during the quarter. In spite of the positive news locally in recent months, both local equity and property suffered losses for varying reasons.

Naturally, such an environment can be daunting for fund managers. The FTSE/JSE All Share Index (ALSI) fell 6% during the quarter. Within the South African General Equity category, 73% of the unit trust funds managed to deliver returns better than the ALSI, although the majority of the funds still delivered a negative return. Offering better protection in down markets is an argument used by active managers in the active versus passive debate and these results are in line with that, although a quarter is too short a period to make meaningful conclusions.

Investors are normally fearful at the sight of negative returns because no one likes to lose money. Fear leads one to contemplate potential actions to take during periods of market stress, for example, moving out of the market and into cash which is perceived as safer. This is a bad choice for investors, particularly those with a long term investment horizon. Using local equity market data dating back to January 1970, the ALSI has gone through 59 quarters of negative returns out of 193. In 48 years, we have had 10 years in which the annual return has been negative.

Average performance of local equity managers follows the point above and a comparison with the average cash plus performance. The average cash manager has not experienced negative annual returns over this period, whilst the average equity manager has gone through 7.

Chart 1: Average Manager Yearly Returns – Equity vs Cash Plus (1980 – 2017)

Source: Seed Research, Morningstar Direct (16/04/2018)

The chart below illustrates the gap between long term average equity manager returns and short term interest bearing manager returns. In spite of the negative returns experienced by equity managers, over the long term the gap in performance is very wide, showing the compounding power in investment growth. Therefore, a long term investment horizon favours remaining invested in the market, even through negative cycles, not getting bogged down by short term negative performance.

Chart 2: Long Term Investment Growth

Source: Seed Research, Morningstar Direct (16/04/2018)

Shorter investment horizons, however, require a less risky approach and multi-asset funds are useful in managing volatility and minimising drawdowns through diversification. Investment objectives largely determine the most appropriate portfolios, with short term horizons requiring lower exposure to risk assets. At Seed we follow a multi-manager process, which allows not only the diversification of asset classes, geographies and currencies, but also managers and investment styles. This is particularly important in a fragmented market, in which dispersion in performance can be large.

During the last quarter, the ASISA Multi-Asset High Equity and Low Equity categories produced performance differentials of roughly 9.6% between the worst performing and best performing funds; High Equity [-8.1% : 1.5%] and Low Equity [-5.5% : 4.0%].

The Seed funds within these categories held up well, producing performance ranking in the top quartile for the Seed Balanced Fund, and the second quartile for the Seed Stable Fund as illustrated in the Chart 3 (below).

Chart 3: Performance Relative to Peer Group

Source: Seed Research, Morningstar Direct (16/04/2018)

The take away is an important reminder to investors that meaningful conclusions cannot be drawn from short term performance. Long term performance of at least 5 years is more appropriate for accurate analysis.

Kind regards,

Tawanda Mushore

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