People always seem to think bigger is better, but is this always the case when it comes to stock selection? So far this year (YTD), the FTSE/JSE All Share TR Index which represents most of the shares listed on the JSE, including large, mid and small caps, has achieved a total return of approximately 17.5%. One would think that SA Investors would be celebrating and praising the market’s effort. If you did, you could well be mistaken. What is quickly becoming known as the most hated bull market in recent times, is continuing at full pace, making new highs on a daily basis. It is only when we take a closer look at where the returns originate from that the true picture starts to reveal itself.
Looking at the SA Domestic General Equity universe (all local Equity Unit Trusts, excluding all market trackers) you may find it interesting to note that only 3% (or 4 out of 142 Funds!) of the local equity unit trust universe managed to outperform the All Share for the period since 1 January 2017.
Just to be clear, this is not an article set out to bash active management and I’m aware it’s a very short period, this is rather an indication of how reliant the SA Unit Trust Managers are on stock picking. This much needed and crucial stock selection skills generally take place among the Mid Cap shares where analyst coverage is less and opportunities for selecting better value are therefore more readily available . What we have experienced over the past few months was extraordinary and although it was great to experience, it should be noted that as with all good things, like the current Large Cap outperformance trend, they all eventually come to an end.
The below graph shows the YTD total returns for the FTSE/JSE Top 40 and Mid Cap Indices. These indices constitute the majority of the All Share Index and it is clear that the phenomenal returns in the market this year has largely been driven by the performance of the large cap shares. The returns are clustered around a few of the larger capitalisation shares that have returned +/- 20% YTD. If you were under weight or completely out of these “big” names in the Top40 index, you were left out in the cold with very little returns to show for the period.
Looking at the Sharenet Analytics RTA relative returns below, it becomes clear how mid caps (J201) lagged the large caps (J200) since March 2017. Applying a simple regression analysis to the recent movements, it seems likely that this move may be overdone and investors with portfolios skewed or biased towards larger cap shares should now probably review or rebalance their investments. Periodically reviewing your investments is generally accepted as a prudent strategy to ensure that the focus is on the correct sectors for the next few months and year ahead.
Fortunately, this is not a movie destined to end on a cliffhanger. So if you would like to access mid-cap shares info and need to determine where to focus, look no further. We analysed the mid-cap shares and compiled a basic ranking of Top 5 shares based on various ranking measures.
The table below provides the top 5 shares:
A: ranked by historical as well as forward or forecasted Price to Earnings ratios (P/E) and Dividend Yields (DY).
B: ranked by expected returns for each share based on analyst recommendations.
The final table (C) shows the top 5 mid-cap holdings by weight of the recently released Sharenet BCI Equity Fund (to find out more about this unit trust fund and several other unit trust strategies you may be interested in, visit Sharenet Investments).
A: Price to Earnings Ratios and Dividend Yield
B: Expected returns
C: The top 5 mid-cap shares, by portfolio weight, in the Sharenet BCI Equity Fund
A word of caution: the shares listed above should not just be taken and invested into at face value, but it is a very good starting point for further analysis. Generally, investors should reassess and review their current holdings and compare it to the potential new inclusions above and consult their financial advisor or stockbroker. Readers are of course welcome to contact our Equity Dealing Desk for more investment or trading ideas. Contact them direct on 021 700 4800.
Chief Executive Officer
JC completed a B.Comm degree and MBA (Cum Laude) at Stellenbosch University. He started his career as part of a listed UK Securities and Derivatives team, based in London in 1998. During his time in London he was exposed to a variety of global markets and asset classes, and became a member of the OTOB (European Derivative Exchange). In 2000 he returned to Cape Town and joined the Asset Management industry as an investment analyst and a member of the investment team that later became part of NIB. In 2001 he moved to join a Cape Town based Stockbroker as a private client portfolio manager until 2003. JC was one of the founding members of a boutique Asset Management firm and led the Asset Management division until 2016 when he joined Sharenet as Group CEO. With almost 20 years experience in the market, his passion for investments and seeking out good ideas is a strong as ever.