2016 Q1 Morningstar Fund Observer
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The document provides a quarterly market summary and performance data for South African and global markets and funds. It includes: - South African and global market index returns for the past month, quarter, 1 year, 3 years and 5 years. The JSE All Share returned 3.17% for the quarter. - Estimated quarterly net flows and ratings data for the largest South African fund managers. Allan Gray and Coronation had the highest percentages of 4-5 star rated funds. - Performance by ASISA category for the past month, quarter and 1 year. The SA RE General category returned 7.8% for the month.
2016 Q1 Morningstar Fund Observer
- 2. Morningstar Fund Observer | 1st Quarter 2016 7Commentary: Quarterly Market Summary 8Commentary: Fund Fees Predict Future Success or Failure 5Data: Fund Houses 6Data: Market Performance 3Data: Individual Funds 4Data: Fund Categories Contents ©2016 Morningstar, Inc. All rights reserved. The information, data, analyses, and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or accurate. Morningstar, Inc. shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use.
- 3. Morningstar Fund Observer | 1st Quarter 2016 Page 3 Morningstar Rating Return (Past Quarter) Mstar Category Quartile Rank Return (1 Year) Fund Level AUM (R Mil) Quart Est Net Flow (R Mil) Short Term Bond Coronation Strategic Income 4 2.6 19 7.4 22 440 -696 STANLIB Income 4 2.0 71 7.3 19 945 344 Cautious Allocation Allan Gray Stable 5 2.8 10 14.9 38 095 736 Prudential Inflation Plus 5 2.2 23 6.5 38 317 21 Coronation Capital Plus 3 1.8 43 3.5 20 795 -1 188 Coronation Balanced Defensive 4 1.4 56 6.4 39 316 -1 257 ABSA Absolute 3 1.0 73 4.9 17 765 -578 Nedgroup Inv Stable 4 0.1 88 7.3 34 292 498 Moderate Allocation Allan Gray Balanced 5 4.7 5 14.0 115 388 -476 Investec Opportunity 5 3.7 8 13.1 40 260 244 Prudential Balanced 4 2.3 32 5.4 13 654 238 Discovery Balanced 4 1.6 48 5.4 16 007 1 266 Coronation Balanced Plus 4 1.4 55 4.7 84 172 -1 487 Foord Balanced 5 1.0 62 5.8 49 385 86 South African Equity Coronation Top 20 3 14.0 6 - 1.8 18 150 -893 Allan Gray Equity 5 7.0 19 9.4 39 672 -847 Foord Equity 5 4.8 35 0.7 12 731 -322 Old Mutual Investors 4 3.5 53 2.6 13 631 -64 Nedgroup Inv Rainmaker 3 3.4 55 3.9 15 702 -344 Global Equity Allan Gray - Orbis Global Equity FF 5 - 2.9 12 19.2 15 613 -209 Performance and Estimated Net Flows for Largest 20 Funds by AUM ©2016 Morningstar, Inc. All rights reserved. The information, data, analyses, and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or accurate. Morningstar, Inc. shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use. AG Balanced AUM: R115bn AG Equity AUM: R40bn AG Stable AUM: R38bn Coro Bal Defensive AUM: R39bn Coro Bal Plus AUM: R81bn Coro Capital Plus AUM: R21bn Foord Balanced AUM: R48bn Investec Opportunity AUM: R40bn Prudential Inf Plus AUM: R38bn 0 50 100 150 200 250 300 350 400 450 0 50 100 150 200 250 300 350 Avg Mkt Cap (R bn) # of holdings 10 Largest Funds: Market Cap vs # of holdings Nedgroup Stable AUM: R34bn
- 4. Morningstar Fund Observer | 1st Quarter 2016 Page 4 ASISA Categories Return (1 Month) Return (Past Quarter) 1 Year Return Category AUM (R m) Quart Est Net Flow (R m) South African RE General 7.8 6.0 4.2 64 927 -880 South African IB Variable Term 2.1 5.2 0.8 44 415 -1 586 South African EQ General 6.7 4.5 0.4 284 860 -692 South African EQ Mid/Small Cap 7.3 3.5 1.8 6 687 -57 South African IB Short Term 0.7 2.0 6.8 85 054 53 South African MA High Equity 3.4 1.6 4.6 428 673 4 786 South African MA Low Equity 1.9 1.5 5.6 236 675 2 773 South African MA Medium Equity 2.7 1.4 4.7 46 327 -402 South African MA Flexible 3.8 1.3 2.0 55 345 1 671 Worldwide MA Flexible 0.9 - 2.6 9.1 23 111 236 Global RE General 0.7 - 2.7 19.2 8 802 -42 Global MA Low Equity - 4.0 - 3.8 19.7 3 728 390 Global MA Flexible - 2.3 - 5.0 15.0 18 285 862 Global MA High Equity - 2.2 - 5.0 16.4 11 342 744 Global EQ General - 1.5 - 5.9 14.0 71 081 941 Morningstar Categories Return (1 Month) Return (Past Quarter) 1 Year Return Category AUM (R m) Quart Est Net Flow (R m) Property - Indirect South Africa & Namibia 8.0 6.8 4.9 66 457 -926 Diversified Bond 2.2 5.5 0.8 44 229 -1 424 South Africa & Namibia Equity 6.9 4.8 0.9 279 452 187 Flexible Bond 1.2 2.5 6.9 53 761 3 389 Bond - Short Term 1.0 2.3 6.7 85 235 -924 Bond - Ultra Short Term 0.7 1.9 6.8 51 092 518 South Africa & Namibia Small-Cap Equity 6.8 1.8 3.1 8 795 -220 Aggressive Allocation 3.5 1.6 5.3 57 681 573 Cautious Allocation 1.5 1.4 6.5 246 652 6 866 Moderate Allocation 2.5 1.1 5.7 421 025 1 820 Flexible Allocation 2.0 - 0.4 5.6 97 505 4 728 Global Bond - ZAR/NAD - 4.7 - 1.3 20.9 1 353 107 Property - Indirect Global 1.4 - 1.9 20.0 8 703 -23 Global Large-Cap Blend Equity - 0.5 - 5.8 15.5 59 119 743 Africa Equity - 0.5 - 6.3 - 7.1 2 316 -149 Performance and Estimated Net Flows by Fund Category ©2016 Morningstar, Inc. All rights reserved. The information, data, analyses, and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or accurate. Morningstar, Inc. shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use.
- 5. Morningstar Fund Observer | 1st Quarter 2016 Page 5 AUM (R Mil) (30/09/2015) Quarterly Net- Flow (R Mil) Net-Flow Rank # of 4 & 5 Star** Rated Funds Total # of Star Rated Funds % of Funds rated 4 & 5 Stars ABSA Fund Managers 36 930 -138 32 8 56 14% Allan Gray Unit Trust Mgmt 210 959 -748 35 9 9 100% Ashburton Management Company 9 885 221 14 9 20 45% Boutique Collective Investments 54 761 3 903 3 35 138 25% Cadiz Collective Investments 1 296 -62 29 1 12 8% Ci Collective Investments 6 085 829 9 6 40 15% Community Growth Mgmt Co 748 0 22 0 2 0% Coronation Management Co 230 542 -7 138 37 35 62 56% Discovery Life Collective Inv 28 538 1 701 5 2 10 20% Element Unit Trusts 930 15 21 3 15 20% FNB Unit Trusts 284 -3 23 0 1 0% Foord Unit Trusts 74 379 -112 31 21 21 100% Grindrod Collective Investments 2 972 46 19 1 5 20% H4 Collective Investments 9 341 -26 25 0 5 0% Investec Fund Mgrs SA 127 630 871 8 69 139 50% Investment Solutions UTs Ltd 17 288 93 17 6 16 38% IP Management Company 5 489 267 12 9 56 16% Kagiso Collective Investments 2 083 -61 28 0 6 0% Marriott Unit Trust Mgmt Co 9 117 -50 26 5 17 29% MET Collective Investments Limited 32 803 2 688 4 39 116 34% Momentum Collective Investments 43 266 -252 33 80 230 35% Nedgroup Collective Investments 112 079 261 13 60 109 55% Oasis Crescent Management Co 13 723 -50 27 15 32 47% Old Mutual Unit Trust Mgrs 70 603 109 16 18 83 22% Personal Trust Intl Mgmt Co 5 079 -6 24 2 5 40% PPS Management Company (Pty) Ltd 11 208 739 11 4 21 19% Prescient Management Co 46 792 4 894 1 71 146 49% Prime CIS Mgmt Co 3 024 28 20 6 9 67% Prudential Portfolio Managers 86 697 1 577 7 25 37 68% PSG Collective Investments 25 518 -501 34 16 42 38% RECM Collective Investments 1 336 -63 30 0 5 0% Rezco Collective Investments 8 371 1 657 6 4 8 50% Sanlam Collective Investments 100 304 3 932 2 87 266 33% Satrix Managers (Pty) Limited 7 531 827 10 0 16 0% STANLIB Collective Investments 100 264 -1 436 36 49 175 28% STANLIB Multi-Manager 34 221 58 18 9 37 24% Sygnia Collective Investments 5 722 134 15 3 3 100% *Figures are estimates which exclude Money Market and Fund of Funds **Morningstar rates investments from 1 to 5 stars based on risk-adjusted performance relative to similar investments over a minimum of 3 years 1st Quarter Net Flows* and Morningstar Ratings by Fund Company ©2016 Morningstar, Inc. All rights reserved. The information, data, analyses, and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or accurate. Morningstar, Inc. shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use.
- 6. Morningstar Fund Observer | 1st Quarter 2016 Market Performance * Local Market Indices 1 Month Quarter/YTD 1 Year 3 Years 5 Years JSE All Share JSE All Share SWIX JSE Top 40 JSE SA Listed Property JSE Small Cap JSE Mid Cap STeFI Composite Beassa ALBI 6.44 8.32 6.07 9.48 8.29 8.51 0.58 2.63 3.17 2.65 3.29 4.57 3.75 2.13 6.61 -0.61 3.87 5.88 1.50 10.10 11.39 18.83 1.68 6.55 12.78 14.58 12.68 14.35 14.65 13.07 6.01 3.98 13.57 15.43 13.04 19.81 17.53 16.08 5.81 7.79 Global Market Indices 1 Month Quarter/YTD 1 Year 3 Years 5 Years MSCI World S&P 500 FTSE 100 TR GBP Nikkei 225 Average Shanghai SE Composite 7.48 6.78 1.78 5.35 11.75 0.38 1.35 0.07 -11.23 -15.12 -3.81 1.78 -5.26 -11.05 -19.85 6.10 11.82 2.43 12.48 10.33 5.80 11.58 4.66 13.51 0.51 Top 10 Stocks by Market Cap Quantitative Moat Quantitative Fair-Value Estimate Quantitative Valuation Quantitative Valuation Uncertainty Quantitative Financial Health Naspers SABMiller Richemont BHP Billiton British American Tobacco Steinhoff Sasol MTN Old Mutual Standard Bank Wide 1 770.65 Overvalued Medium Moderate Wide 869.28 Overvalued Low Strong Wide 115.13 Undervalued High Strong None 166.18 Fairly Valued High Moderate Wide 890.26 Fairly Valued Low Moderate Narrow 92.14 Fairly Valued High Strong None 141.50 Undervalued Medium Moderate None 381.46 Overvalued Medium Moderate None 42.05 Undervalued Medium Strong Narrow 167.04 Undervalued High Moderate *All Returns are in base currency JSE Sector Indices 5.1 18.1 -8.5 0.8 -2.8 25.2 10.0 -1.0 6.8 11.5 6.2 -0.7 8.8 2.5 -11.0 7.8 7.6 -4.0 4.4 1.3 -12.4 7.3 6.7 -21.5 -25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 Basic Materials Consumer Goods Consumer Services Financials Health Care Industrials Technology Telecommunication Total Ret 1 Mo (Qtr-End) Total Ret 3 Mo (Qtr-End) Total Ret 1 Yr (Qtr-End)
- 7. Kyle Cox Investment Analyst Morningstar Investment Management The first quarter of 2016 brought with it massive amounts market volatility resulting in a challenging period for fund managers. Rand strength and a strong recovery in commodity prices broke the trend that has seen offshore categories oupterform their local counterparts in recent times. Indeed, all 14 local ASISA categories produced positive performance for the quarter while all 11 offshore categories ended the quarter in negative territory. This performance is a stark contrast to that seen in 2015, with the strong returns from resource stocks on the back of rising commodity prices a prevalent theme throughout a bumpy quarter. Local asset prices recovered nicely in the first quarter, and were bouyed by a strengthening Rand, rising commodity prices and a generally well-received national budget. It must be noted however that the quarterly gains in local asset prices largely represent a recovery from relatively low price levels as opposed to a rally based on improving economic fundamentals. This said, the trend of lower returns from the largest unit trust categories continued with only mildly positive returns evident in the first quarter. Returns from the multi-asset categories have come under increasing pressure with a growing disparity evident between their returns and the local equity market. For instance, compared to the FTSE/JSE All Share Index 's return of 3.9%, the South African Multi-Asset categories all experienced similar, low returns: High Equity (1.6%), Medium Equity (1.4%), Low Equity (1.5%) and Flexible (1.3%). The General Equity category, however, outperformed the index, with a return of 4.5% for the quarter. Global markets provided a mixed bag of performance over the quarter resulting in flat to negative gains at an aggregate level. In US dollar terms, emerging markets outperformed their developed peers as investors' risk appetite grew through the second half of the quarter. Rand strength over the quarter was a ubiquitous theme, and pushed returns from offshore categories into negative territory for the period. In a turnaround of fortunes, local categories dominated the list of best performing categories in the first quarter of 2016. South African Resources was top of the list with a stellar return of 20.4% in the first quarter, as rallying commodity prices stimulated a recovery in asset prices within the sector. The next best performing categories were South African Listed Property and South African Interest Bearing Variable Term with returns of 6.0% and 5.2% respectively. Interestingly, the multi-asset local categories underperformed the more asset class specific categories. This is indicative of the higher aggregate cash drag and larger offshore allocations evident in the local multi-asset portfolios. The worst performing category for the quarter was Regional Equiity General with a return of -9.0%. Indeed, weak global market performance coupled with a strengthening Rand negatively impacted all offshore categories in the first quarter. The next worse performing category was Global Equity General with a quarterly return of -5.9%. The best performing funds in first quarter of 2016 were the Old Mutual Gold fund (63.3%), the Investec SA Value fund (41.2%) and the Investec Value fund (39.1%). These results aren’t surprising given the strong rally commodity prices and therefore resource stocks, which dominate the above portfolios. Meanwhile the worst performing funds included the Investec Africa fund (-16.2%), Prescient China Balanced fund (-14.0%) and the Flagship IP Worldwide Flexible Fund of Funds (-13.2%). Rand strength as well as unfavourable market movements were the key drivers of underperformance of the above mentioned funds over the quarter. In conclusion, 2016 has seen a long-awaited return to form of the value style of investing, which outperformed the growth and momentum styles in the first quarter. *unless otherwise stated returns are quoted in Rand terms Commentary A turnaround in fortunes for local categories as domestic asset prices and the Rand gained ground in what was a highly volatile, yet positive, period for markets. Local equities, property and bonds post positive returns during a period of Rand strength and strong gains in commodity prices... Page 7Morningstar Fund Observer | 1st Quarter 2016
- 8. Russell Kinnel Director of Manager Research If you've been following Morningstar's research for long, you know how important we think expense ratios are to the fund selection equation. The expense ratio is the most proven predictor of future fund returns. We find that it is a dependable predictor when we run the data. That's also what academics, fund companies, and, of course, Jack Bogle, find when they run the data. But it's been a couple of years since I provided the proof statement, so we have updated the data to show just how strong and dependable fees are as a predictor of future success. That's not to say investors should use them in isolation. There are many other things to consider, but investors should make expense ratios their first or second screen. How We Ran the Test To begin any test of predictive power, we use historical data so that we are using the data that investors would have had access to at the time. That includes funds that no longer exist. In fact, that's a key part of the story because higher-cost funds are much more likely to fail and be merged away. If you do not factor them in, you will see better performance from higher-cost funds than was the reality, as those that survived naturally are more likely to have produced better performance while so many failures have been culled. We looked at a few different measures to test how expense ratios worked: total return over the ensuing period, load-adjusted returns, standard deviation, investor returns, and subsequent Morningstar Rating. In addition, we calculated a success ratio for all the above measures. The success ratio is our way of factoring in mutual funds that were merged away or liquidated over the ensuing time period. The other figures only include data on funds that survived the whole time period. But the success ratio asks, "What percentage of funds survived and outperformed their category group?" Only funds that did both count toward the success ratio, as it is hard to argue that funds that no longer exist or underperformed were successful. For our tests, we began by grouping funds into quintiles within their peer group and then rolled that up into an asset class. That means we ordered each Morningstar Category, such as large growth, high-yield muni, and so on, into quintiles. Then we grouped all the cheapest-quintile funds in an asset class, then the second-cheapest-quintile funds, and so on. We also ran all of the above tests against a universe in which only one share class per fund was included. Some readers of past studies wondered whether fees were as strong for selecting between funds rather than among share classes of the same fund. So, to eliminate comparisons of multiple share classes of the same fund, we limited this test to the oldest share class of a fund. We looked at the five years ended December 2015, the four years ended 2015, and so on. The Answer: Costs Really Are Good Predictors of Success We've done this over many years and many fund types, and expense ratios consistently show predictive power. Using expense ratios to choose funds helped in every asset class and in every quintile from 2010 to 2015. For example, in U.S. equity funds, the cheapest quintile had a total-return success rate of 62% compared with 48% for the second-cheapest quintile, then 39% for the middle quintile, 30% for the second-priciest quintile, and 20% for the priciest quintile. So, the cheaper the quintile, the better your chances. All told, cheapest-quintile funds were 3 times as likely to succeed as the priciest quintile. (If you're wondering why only one quintile had a success ratio above 50%, it's because many funds did not survive the time period. If no funds were merged away, then the overall success rates would average something close to 50%.) As it was, about 20% of the funds were merged away, making 40% the average success ratio point. Fund Fees Predict Future Success or Failure Fund Fees have remarkable predictive power, and investors can put them to their advantage Commentary Page 8Morningstar Fund Observer | 1st Quarter 2016
- 9. The pattern was pretty similar in other asset classes. For example, international-equity funds had a 51% success ratio for the cheapest quintile compared with 21% for priciest. Balanced funds had a 54% success rate for the cheapest quintile compared with 24% for the priciest. Taxable-bond funds were even more striking, as the cheapest quintile delivered a 59% success rate versus just 17% for the priciest quintile. Muni bonds had a similar pattern, with a 56% success rate for the cheapest quintile and 16% for the priciest. The predictive power also holds up in the other areas we tested. It points investors to a better outcome for investor returns and for load- adjusted returns. That makes some sense, as both are fairly closely tied to total returns. It was a much weaker predictor of standard deviation, though that's not a big surprise, as fees and volatility are not very closely linked. For U.S. equity funds and sector funds, standard deviation was a hair lower for lower-cost funds. There wasn't much pattern for the other asset classes. Funds with high costs, especially in bonds, do tend to take greater risk in order to produce a competitive yield. However, that generally means taking on more credit risk, and credit risk damps standard deviation except when it blows up. So, what if we limit our fee test to just one share class per fund? It actually shows stronger predictive power. For example, the success rate of returns in U.S. equity funds rose to 64% with just one share class versus 62% with all of them, and the priciest quintile falls to 15% versus 20% for all share classes. This was true in most asset classes except for international equity, where the success rates became more compressed. More important than the slight improvement in results is the larger point that this clearly helps you choose among funds and that the share-class criticism of fee studies does not hold up. Finding Cheapest-Quintile Funds Now that you know expense ratios are a crucial part of fund selection, how do you find the cheap ones? On Morningstar.com, you can search for below-average fees using the Fund Screener. Also, on individual fund data pages, we describe fund expense ratios from Low to High on the Expense tab. Finally, the Fund Spy selector on mfi.morningstar.com tells you whether a fund's fees are in the cheapest quintile. Just enter the fund ticker. Fund Fees Predict Future Success or FailureCommentary Morningstar Fund Observer | 1st Quarter 2016 Page 9
- 10. ©2016 Morningstar, Inc. All rights reserved. The information, data, analyses, and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or accurate. Morningstar, Inc. shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use.