2018 was a year most investors would like to forget and there were few places to hide. Not only did global markets chew into investors’ capital, but also took a rollercoaster-like path before ending the year in the red. Market volatility made a sudden appearance, catching many by surprise, and carried with it extreme price movements only few in the market have had the displeasure of witnessing before. Between Donald Trump and his tweets; Chinese trade tensions and the Brexit saga in Britain, it almost felt like they were taking turns battering the market.
South African investors have been under-compensated over the last four years for the risk taken in the equity market. Returns have struggled to match even inflation over this period.
In 2018, SA equity (JSE All Share index) delivered a disappointing -8.5%, while the SA Listed Property index crashed (-25.3%). The property sector took pain at the start of the year with rumours about the Resilient group and never recovered. There is great concern about the accounting methods employed by companies in this sector and it is going to take some time for investor confidence to return.
South Africa is no stranger to seeing weak market performance due to politics, and during these periods have the option to move capital offshore to improve performance. This was not the case in 2018. Global markets (MSCI World Equity Index) declined by -8.2% in 2018, with the UK FTSE index -14.1% and Emerging Markets -14.3% among the worst performers.
The star among the asset classes was income investments where the SA All Bond index delivered +7.7% for the year, marginally better than cash (STeFI index) with +7.3%.
Investors are increasingly pessimistic of an economic recovery any time soon and seek a safe haven to weather these stormy markets. A solution for investors could be to invest in income funds. An example, is the Sharenet BCI Income Plus Fund (unit trust) that delivered +9.54% for the year, a real return of inflation plus 4%! Remarkably, the return was generated in a period of extreme market volatility and a changing interest rate environment, a testament to the fund’s sound strategy. The fund achieves this by investing in quality fixed interest instruments with a short duration and a focus on floating rate investments.
There are still big question marks hanging over global markets including a possible no-deal Brexit. The world is also waiting with bated breath to see if the US (Trump) and China will be able to strike a sustainable trade agreement. While these and other issues persist, there are rising concerns that we might be standing on the cusp of a global economic recession. Income fund unit trusts like the Sharenet BCI Income Plus Fund can potentially offer investors a safe haven with good compensation. These funds are liquid, allowing investors to remain nimble and not be locked into an investment. An income fund could be the perfect place to park cash and watch turbulent markets from the side-line until the risk-reward proposition in growth assets like equity and property or even balanced funds looks attractive again.
The below chart shows that most income funds (as measured by the ASISA - SA Multi Asset Income sector) are struggling to outperform the return of cash (STeFI) while Sharenet’s fund trumps the comparison in all periods under review.
Data as at 31 December 2018 | Source: Morningstar
The below risk/return chart gives an indication of the Sharenet BCI Income Plus Fund’s ability to outperform the competition with the added benefit of more stability in returns. (the aim here is to be top-left, higher return with lower risk)
Risk (volatility) vs Return
Data for the period 31 Dec 2015 - 31 Dec 2018 | Source: Morningstar | Income funds from ASISA SA MA Income sector
The fund is well positioned for these uncertain times. We focus on good quality short term fixed income investments with attractive returns that are linked to JIBAR for increased stability.
Readers are welcome to contact us for more information on the Sharenet BCI Income Fund or any other investment-related questions. Fill in the form below or reach us on 021 700 4800 or email firstname.lastname@example.org
Chief Investment Officer
Kobus Louw is acknowledged as one of the leaders in the field of fixed income and investment derivatives in the market. He was Head of Portfolio Management at Sanlam, CIO at Cadiz Asset Management and is currently the CIO at Sharenet.
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