Active managers usually outperform in markets when the financial and industrial index outperforms resources.
Over the past year, the resources and basic industries index has fallen 24,5%, and financial and industrials have fallen 12,9%.
Yet most general equity funds have outperformed both these indices, with a 7,1% negative return for the year. Only the Standard Bank index fund has (marginally) underperformed the all share's 18,6% decline.
The best general equity fund over 12 months has remained the Fraters Earth Equity fund, which does not operate with an approved list of shares like the Community Growth fund but which aims to invest in companies with good corporate governance.
Fraters Asset Management MD James Frater says that being out of Richemont and SABMiller contributed most to performance, while Group Five, Naspers and Woolies were the biggest contributors out of the active bets.
Among the larger general equity funds, Allan Gray Equity, African Harvest Rainmaker and Oasis General Equity were the strongest performers.
And for investors who are getting used to negative returns there were some good black numbers for the quarter. Just 14 funds had negative returns during the quarter, primarily global "safe haven" bond and income funds. The worst performer was one of the best performers of 2000 and 2001, Coronation International Active, primarily because of the write-offs to the Lancer fund (Focus July 18).
The top funds of the quarter have included international equity funds, technology funds, industrial and financial funds.
Royce Long, manager of the RMB Financial Services fund says financials have outperformed by more than 70% since the rand started to strengthen in April 2002.
There will be some slowing down of financials' earnings, he says, as interest rates fall, but with some banks and insurers offering a 6% dividend yield they do not yet look expensive.
And shares with overseas operations are now more sensibly priced - after years of ignoring Old Mutual, Long has been acquiring it at less than R11,50/share.
The risk/reward trade-off between equities and bonds has never looked more compelling, he says, with just 9,5% offered by the R153 long bond.
Armien Tyer, manager of the Sanlam Value fund and a member of its model portfolio group, says it is still time to remain long on financial and industrial shares and short on resources as many resource companies are barely profitable at R7,50 to the dollar, while real bank earnings growth remains ahead of share price growth over three to five years.
Tyer says there is even better relative value in life assurers than in banks and New Africa Capital comprises 8% of Sanlam Value fund's assets.
Allan Gray stands out with its negative view on financials, which make up barely 6% of its equity fund (see page 70). The house warns that the banks' ability to continue growing their non interest income will come under pressure, while other sectors of the market such as retailers still offer better value for money.
The equity markets remain bewilderingly unpredictable for most unit trust investors, so it is no surprise that they are turning to the safer havens of fixed interest and absolute return products instead (see next story).
A number of strategies have been implemented for absolute return funds. Investec claims to have the oldest absolute return fund, Investec Opportunity launched in 1997 - though it was not originally marketed that way. Opportunity tries to avoid capital losses by investing in undervalued shares, and it has the right to go up to 100% in cash if there are no suitable investments.
More recently, strategies that focus on inflation-linked bonds, such as Prudential Inflation Plus and Absa Inflation Beater have been popular.
Allan Gray Optimal and RMB Absolute Focus have also been launched, which hedge out the underlying index, and provide investors with cash returns plus (or minus) the manager's alpha, or excess performance.
Investec has entered the fray with two funds that adopt a number of the inflation beating strategies.
Investec Absolute Income aims to outperform inflation plus 3%. Fund manager John Stopford says the fund aims to avoid capital losses over any rolling six-month period, and to provide consistent returns in bull and bear markets in bonds.
The default allocation is 80% cash and 20% inflation-linked bonds, but it will buy property counters and conventional bonds opportunistically.
To avoid capital losses on bonds, however, it will use Safex-registered derivatives to hedge this out - and the basket of futures and options it is permitted to use should soon expand.
It currently has no inflation-linked bonds, which Stopford says do not offer value while CPI flattens out in the short term. The fund is primarily invested in a portfolio of hedged conventional bonds.
The fund is focused primarily on low tax and tax-free vehicles such as retirement annuities and living annuities.
The Investec Absolute Balanced fund, run by Clyde Rossouw invests 40% in a portfolio which mirrors the Absolute Income fund and 60% of its assets in a hedged equity portfolio. This will include many of the same shares Opportunity has, such as ABI, Afrox and Tiger Brands, but with a higher weighting in Alsi 40 shares to ensure there is not too large a mismatch with the Alsi 40 futures.
