Jannie Leach, head of the Nedgroup Investments Core business since inception, gives us an update on the business and rules-based industry and how Nedgroup Investments has done relative to its peers, an economic and market overview highlighting where the Core range returns have been derived and the Funds’ performance and attribution over the quarter.
The passive industry has just under R300 billion assets under management (AUM), a relatively small portion of the nearly R6 trillion South African investment market. It has, however, experienced 20% year-on-year growth over the last few years with most of this growth from collective investment schemes (CIS). In 2019, the CIS market surpassed the non-CIS institutional assets market. This is in line with international trends where the nature of passive investing requires pooling and scale, so unit trust and ETF structures are ideal to benefit from economies of scale. The biggest growth has been within unit trusts, partly due to the use of multi asset funds. We’ve been quite a big recipient of the flows in that space and have been the fastest growing rules-based provider for the last six years. At the end of 2019, we were the second largest CIS manager with 17.2% market share and 34.4% growth in AUM from R19 billion in 2018 up to R25 billion in 2019. We’ve seen a similar trend in the foreign CIS space with the Core Global Fund growing by about 40% last year. Part of that was growth through our local range that invest in this fund and being the provider of choice on most platforms for umbrella funds and LISPS.
Economic and market overview
Q1 was tough with some big declines in market returns, but big rebounds from those low levels in Q2 where we saw the Capped SWIX up 21.6%, the REIT Index up 16.5% and bonds up by 9.9%. This all happened off a low base, so the longer-term return for South Africa equity markets is still negative at -10.8% for the last 12 months. Property REITS have been very hard hit over the last two years with a return of -46.5% for the last 12 months and only a 1% return over the last 10 years. South Africa’s poor economic outlook and downgrading impacted the bond market with a big decline in March with 1-year returns dropping to 2.8%, but longer-term returns still on track. Cash was at 6% for the last 12 months, but expect that to come down quite dramatically as shorter-term interest rates decline with low inflation. Globally, we’ve also seen rebounds. The MSCI ACWI (including emerging markets) was up by 19.4% in Q2. Developed property was up 10.3% for Q2 with 1-year returns still negative at -15.5%. Global bonds have delivered good returns over the last few years (3.8% over 3 years) but, with declining yields on developed market bonds, they’re unlikely to deliver the same level of returns going forward.
The returns of global market returns influence the performance of our Core Global Fund with the US being a big driver of returns. The MSCI World ex US returns are almost in line with emerging markets over the last six months. The MSCI World (developed markets) delivered a higher return than the MSCI World ex US. So, if you were overweight in the US, your returns would have been higher. South African bond yields have become quite attractive, but this is associated with a lot of risk. US bond rates are very low with the US 10-year bond now trading at a yield of about 0.6% down from 2.23% a year ago. SA yields have gone up to over 9% on the 10-year bond index. We don’t make tactical asset allocations calls within the Core funds so have always got a strategic allocation to bonds. In the fixed income space we typically hold cash, inflation-linked and nominal bonds, with the latter benefitting from higher risk. The portfolio was constructed to be robust through different market cycles with some asset classes providing downside returns while others offer downside protection.
Core Range performance
The South African Core range consists of three Regulation 28-compliant funds. The Core Accelerated Fund is our most aggressive and is a max Regulation 28 balanced fund with a return profile closer to some of the South African equity funds that include offshore. The Core Diversified Fund, our oldest and flagship fund, is a traditional balanced fund. The Core Guarded Fund is a conservative or stable fund that targets a return of inflation plus 2%-4% and has about 40% in risk assets.
Core Diversified Fund: The Fund had a strong comeback and is up 16.5% versus its peers who are up 13.4%. There was a lot of rebalancing in March from offshore to South African assets including SA equity, property and bonds, which have all done really well and contributed to the Fund’s returns over the longer period. Despite a number of drawdowns at the end of 2019 and early 2020, the Fund is still marginally ahead of most of its peers over the 12-month period. This is testament to the way these portfolios are constructed, i.e. very broadly diversified across asset classes and underlying holdings. Over the 3, 5 and 7-year periods, most balanced funds have not been able to achieve their real return objectives mainly due to the poor performance of equities, which is the biggest driver of growth over the long term. Both SA equity and property were detractors over the past year. Cash has provided both stability and yield enhancements via the cash funds we make use of, which has helped returns in a difficult environment. Globals have been the best performers as a result of the Rand depreciation and global markets performing better than SA markets. Some of the biggest drivers were the Nedgroup Core Global Fund, Naspers, iShares Developed World Index Fund, Prosus and AngloGold. The detractors were Sasol, Standard Bank Group FirstRand, MTN and Redefine Properties.
Core Guarded Fund: The Fund’s returns versus its peers have been really good over the last quarter, up by 11.1% versus the peer average of 8.3% which has helped the longer-term returns. The Fund is currently 1.3% ahead of its peers over the last 12 months and in line with its inflation plus 3 benchmark for longer-term returns, from 7 years onwards. The Fund has done slightly better than the Core Diversified Fund in terms of long-term returns because of its lower allocation to equities.
Core Accelerated Fund: The Fund has been around for about 3.5 years and is quite different to most of the balanced funds in the industry. 90% is allocated to risk assets, i.e. equity and property, where the average balanced fund is just under 70%. The Fund performed better than the Core Diversified Fund because of the higher equity allocation returning 18% over the quarter. Over the 12-month period, it is still down by -3.4%. The 3-year return is slightly below the peer group, which is to be expected.
The Global Core Range
The Core Global Fund is the global version of our Core Diversified Fund and is available in a direct offshore fund and in a Rand denominated Feeder Fund. It’s also had quite a strong rebound over the quarter and is marginally behind its peers. Some of that can be attributed to many of its peers holding more US and not a lot of emerging markets. In the 1, 3-year and since inception performance, the Fund is comfortably ahead of its peers. The Rand denominated Feeder Fund is almost in line with its peers over the quarter but, over the longer term, is about 2% ahead. Most of the returns over the past year have come through equities, which have delivered about 1.7% to the Fund’s returns.
Core Bond Fund
This Fund was designed to match the duration of its peers on the premise that if you can match the duration of the peers at much lower fees, you should be able to produce better than average returns over the long term. Over the past year, the Fund has done really well returning 5.5% versus the peer media of 2.3%. Over the long term the Fund is about 0.8% ahead of the peer median. Just more than 75% of the Fund is in government debt in addition to some credit and parastatals. The current gross yield is 9.6% versus the ALBI at about 9.5%.