As 2005 rapidly draws to a close, it is appropriate to take a brief backwards glance. While past returns often have little bearing on future returns, it is still worthwhile to take a look at which sections of the market have performed.
Sometimes lagging sectors and shares can provide opportunities, or at least warrant a closer look.
The environment for equities still seems positive with a robust local economy, judged both by official numbers (such as the retail sales, which still appear to be strong), and also anecdotal evidence (as indicated by the number of Asian tourists at the airport and the hotels when I travel on business).
For the purposes of this column, I have simply used price movements and have taken a look at general market movements to October 31 from the beginning of this year.
No doubt you could have found funds and managers that did a lot better or worse in each case.
All returns are measured in rands.
If we start at the top level, local was clearly the place to be.
Local equities have shown a return of nearly 30 percent for the year to date, doing much better than bonds and cash. This compares to developed world equity markets with a return of 20 percent as measured by the MSCI World Equity index. Note that most of this return is due to rand weakness of some 18 percent. The dollar return is less than five percent for the year.
Of course, had you invested in Japan, your return could have been 24 percent for the year to date, somewhat better.
That's the thing with global markets - the opportunity set is just so vast. Unit trust fund managers have just been given the go-ahead to increase the foreign component of their funds to 25 percent.
It will be interesting to see how many managers take advantage of this in order to reposition portfolios towards foreign equity markets at a time when South Africa is doing much better.
As an investor, it is perhaps time to revisit your reasons for going offshore and look at the foreign component of your overall portfolio.
Lets' take a look at an equity portfolio that had an 80:20 local:offshore weighting at the beginning of 2005. If you got market returns, that portfolio now has a 82:18 local:offshore weighting. Scripline of October 1 examined the reasons for investing offshore.
Think about these issues again and consider whether rebalancing your equity portfolio between local and offshore would be appropriate.
It may be that the lack of inflows and, in many cases, outflows that the industry has seen in locally dominated offshore unit trusts in recent months may again prove to be a sign not to chase areas of past performance - in this case, the local market.
If we look at the next level of returns, the distinction between large cap and small cap shares, despite rand weakness (which should favour large cap shares due to the high resource and rand-hedge component), the performance of the large and small cap sectors was almost identical at 30 percent for the year to date.
If we then go to the sector level of financials, resources and industrials, it is clear that resources performed the best, with gold shares, platinum and of course, Sasol, doing exceptionally well. This year was probably the time to invest in an index tracker, whereas last year was a good year for active managers.
However, having seen such a strong return from resources, one should think twice before assuming that switching to a tracker at this point will solve all your return problems.
Financial shares lagged, returning only 13 percent among the larger financial shares. The larger Industrial shares returned 22 percent for the year to date.
Property shares have done very well. Have another look at the yield that you can get on listed property, and see if you need some yield pick-up in your overall portfolio.
To summarise then:
- Local equities have done much better than offshore investments, with foreign equities lagging.
- Bonds have under-performed
relative to equities.
- Resources have done exceptionally well relative to financial shares.
- Property shares have quietly continued to perform well.
- In October, only four out of the top 10 performing large shares were resource shares, compared with seven out of 10 for the year to date.
As 2006 looms, if you can still muster the energy, swop some Su Doku time for re-assessing your portfolio before the new year starts, and seeing whether any rebalancing is necessary.