Only four asset-allocation funds out-performed cash over the last three years: Alphen

Mark Seymour of Alphen Asset Management reminds us that three years ago, the average retail investor had little idea of what turmoil was brewing in financial markets. For those who had an inkling of the fermenting brew, many drew calm from the knowledge that their capital was under the safe stewardship of professional asset managers.

Against the backdrop of what has transpired over the past 3 years, it is worth reflecting on how these guardians of capital fared as the financial crisis escalated around them (see graph below).

The graph above shows the risk-adjusted performance of all the 284 funds in the Domestic Asset Allocation sectors which have a track record of at least 3-years (as according to Morningstar) as well as what cash returned over this period (9.2%) and the All Share Index’s total return (0.08%).

Interesting points from the above graph are:

1. The All Share Index (total return) delivered a small, but positive, return over the review period

2. 15% of the funds under-performed the All Share Index

3. Just 4 funds out-performed cash over the review period.

Despite the extremely bleak global economic backdrop, the local equity market (which has been the poorest domestic asset class performer) is marginally up over the last 3 years. Over the same period local bonds (not shown in the graph) fared better, whilst marginally under-performing cash (8.8% vs. 9.2% annualised).

A good question to ask is: “Why have 15% of the domestic asset allocation unit trusts experienced negative returns despite the 3 main domestic asset classes all enjoying positive returns over the same period?”

The possible asset management strategies which would have resulted in negative returns over the last 3 years can most likely be ascribed to: Unfortunate tactical asset allocations with inopportune switches in and out of local equities Unfortunate tactical sector allocations with a preference for local resources (at an index level) in favour of local industrials Unfortunate over-weighting to global equities

Over the last 3 years, the resource index (total return) is down -12.6% relative to the industrials index which has gained 17.2%. The financials index is a marginally -1.2% down. Global equities have been the real shocker, with a 34.2% drop in US$ terms, and a 26.8% drop in rand terms (the rand has depreciated 11.3% against the US$ over this period)

As a last word, the honours go to the 4 domestic asset allocation unit trusts which out-perform cash by getting the above mentioned market dynamics right over this period.

They were:

* Cadiz Equity ladder

* ABSA Absolute

* PSG Tanzanite Flexible

* Contego B2 Protected Income

The Alphen Angle is an electronic publication of Alphen Asset Management