Issue: September 2012 / November 2012


Mood swings and roundabouts

Only sometimes are they based on ‘fundamentals’. On average, active asset managers have lately had a hard time of it.


Wahome...benchmarks matter
Don’t ever expect equity markets to be rational. No sooner are they hammering one set of shares or sectors, for reasons that at any particular time sound eminently sensible, than they jump to another.

What’s out of favour can quickly become in favour, depending as much on such variable perceptions as “growth” against “value” as on anticipating the direction that the herd is likely to run. That’s why attempts to time the market are futile, even more so than short-term stock picking.

Over the past year, resource shares have been hit particularly hard; too hard, perhaps, because eventually an attitude takes hold that they’ve been driven to levels where they’re irresistibly cheap. And that means they become buys.

Despite the Eurozone pessimism, and little sign of relief from the recession, since June there’s been a rally in stock markets. Suddenly, it seems, investors are again betting on economic growth. If the bulls are right, they’ll be looking again at the formerly-shunned resources in emerging markets.

Under the present exceptionally volatile circumstances, it hasn’t been easy for active managers on average to add value beyond their benchmarks. A key reason is that many have significant weightings in resource shares that are relatively cheap in relation to retailers (see chart).

Also, points out Muitheri Wahome of Investment Solutions, a number of the asset managers are benchmarked against the SWIX. This index has a low weighting in resource shares and so has been much tougher to beat than the JSE All-Share index.

SWIX, the shareholder-weighted index of the Top 40 JSE-listed companies, reduces the constituent weights for foreign shareholdings. It has the effect of reducing by about half the weightings of mainly resource and dual-listed stocks in the Top 40.

Primarily, says the latest Alexander Forbes equity manager watch, active managers’ performance challenge has been a function of the significant valuation gap between mid-cap, industrial (primarily retail and consumer) shares and resource shares: “With a broad swath of SA managers gravitating towards value-orientated investment strategies, a large segment of managers have piled into the undervalued mining shares to an extent that has not been seen in a decade or two. Unfortunately, this is also the segment of the market that has performed the most poorly.”

So far, but hold on. That’s what pension funds are supposed to do. Let the great active-versus-passive debate continue.

Click to enlarge