Few fund managers could have predicted how different 2002 would turn out to be from the previous year. Once again, the call on the rand was the main determinant of performance, but this time it was rand strength rather than weakness that proved to be the driver.
It was a disappointing year for local equities, as the all share index declined 8,1%, but a catastrophic year for global equities, compounded by the stronger rand. The benchmark Morgan Stanley Capital International (MSCI) world index fell 42,5% in rand terms.
Some of the strong performers of recent years fell on hard times because of their international exposure, including FT NIB Prime Select, the worst performer in the general equity category, with an 18,25% decline for the year, and Liberty Wealthbuilder (a disappointing 41st out of 53 with a negative 6,5%).
Even RMB Strategic Opportunities, a perennial favourite of the FM, had a dreadful year, coming bottom of the growth fund category with a negative 14,79%.
Strategic Opportunities fund manager Royce Long says RMB did not predict that the rand would strengthen 40% for the year, but it had considered bringing back some of the offshore holdings in the fund, which peaked at about 20%.
The offshore holding was set up when growth funds were not allowed to invest in resources as a way of benefiting from the depreciation of the rand.
"Over the long term, this holding has been beneficial to unit holders. We would have liked to reduce the dollar exposure by swapping our dollar position back into rand, but this was prohibited by unit trust rules. And we knew, if we repatriated the holdings, we would not be able to take it back offshore later." Long says that the offshore holding was the main reason for underperformance.
Liberty Wealthbuilder fund manager Imtiaz Ahmed says though he kept a third of his offshore holdings in cash and bonds and his equity holdings outperformed their benchmark, the foreign component of the fund, which accounts for 10% of holdings, fell 28%. Without this, Wealthbuilder would have been 29th, not 41st, in the tables.
But Wealthbuilder also suffered from a large-cap bias. In its mandate, it cannot invest more than 10% of assets in small and mid caps and its 8% exposure was well below the sector average of 22% outside the Alsi 40.
There was a significant difference between large caps and mid and small caps, with the Alsi 40 down 11%, the mid-cap index up 22% and the small-cap index up 11%.
Under the circumstances, the best way Ahmed could protect unit holders was by increasing the cash component of the fund, which was increased to 15,7% during the year.
There are diverging views in the industry on the role of cash in general equity funds. Investment Solutions unit trust head Anton Ossip argues that investors have made a conscious choice to buy equities, so it aims to keep the cash holding in its equity fund close to the 5% statutory minimum at all times - and when this falls away later in the year, it aims to get close to 100%.
But Charles Booth, who runs the RMB Equity fund, says it is often in the interests of unit holders to keep a portion of the fund in cash to take advantage of buying opportunities, without having to liquidate other equity holdings. General equity funds are permitted to hold up to 25% in cash and RMB Equity is 11,5% liquid.
Along with other house view funds, such as Old Mutual Investors and Investec Equity, RMB Equity had a strong first half, but an average second half.
Booth says the fund would have benefited from more mid caps and missed the boom in clothing retailers, though it had some success with Metcash and JD Group, and some shares that are too small to feature in the RMB house view portfolios such as Argent (which it picked up in a share placing) and Astral.
Old Mutual Investors' fund portfolio manager Charles de Kock says strong holdings in gold and Sasol pushed performance in the first half. In the second half, however, there were some "not too clever" purchases such as Investec, which hurt performance.
De Kock has maintained a relatively high resources position, though he has taken profits in Gold Fields, Angloplat and Kumba. He says the dollar prices of platinum, gold, steel and coal remain supportive for the sector and the economy as a whole.
Investec Equity, which was aligned quite closely with the Alsi 40 last year, sold out of gold shares altogether during the quarter and it holds no BHP Billiton shares. Fund manager Gail Boon says both are expensive and offer the prospect of negative earnings. She has maintained a 7% weighting in Anglo American because the underlying commodities are doing better than Billiton's basket.
It has been a strong year for general funds that invest more freely across the spectrum. Allan Gray Equity began the year with a low exposure to Alsi 40 shares, other than Sasol, but it has recently built up its position in Anglo American and Angloplat, as they start to reach compelling valuations after the release of the mining charter.
Fund manager Stephen Mildenhall says the fund has an overweight position in gold, not because of short-term concerns such as the possibility of war in Iraq, but because of the fundamentals of increased jewellery demand and reduced supply from maturing mines. "These conditions favour companies that have big reserves to develop, which is why Avgold is our largest gold holding."
Liberty Prosperity had a substantially stronger year than its sister fund Wealthbuilder, being placed 9th out of 53 funds with a 4,55% return.
Prosperity has far more latitude to invest into smaller counters.
Fund manager Daryll Castle says that there was little difference in the performance of the two funds until the end of 2001 because both had gravitated towards large caps. Last year, however, Prosperity made use of its wider mandate to add in up to 15% in shares such as Seardel, Software Connection and Brandcorp.
