In South Africa the returns from local exchange-traded funds ( ETF) in 2016 demonstrate just how wrong it is to bet on past performance as a guide to future performance. Some of the investments that performed strongest for the 12 months to December 31st 2016 were among the worst performers the year before.
NewFunds S&P Givi Resi ETF produced a return of just under 35% in 2016 making it the top performing ETF over the last two years. However, this ignores that all of that positive performance was in 2016; it actually was negative performance in 2015!
The CoreShares Green ETF lost 16.53% during 2015, but returned 28.78% last year.
The Satrix Resi, a resource fund was is third placed; remarkable considering that in 2015 it was the worst performing South African ETF, losing 36.84%.
ETFs with significant exposure to resource and banking shares outperformed in 2016, but may not do so in 2017 as world markets face turbulence in those sectors. However, last year the two resource-focused ETF listings on the JSE were both among the top three.
The table below shows the top performing funds in 2016.
Their 2015 performance is also given to illustrate the contrast.
| ETF performance for 2015 and 2016 | ||
| Fund | 2016 return | 2015 return |
| NewFunds S&P Givi Resi | 34.89% | -1.74% |
| CoreShares Green | 28.78% | -16.53% |
| Satrix Resi | 28.26% | -36.84% |
| Ashburton MidCap | 25.61% | -7.79% |
| Satrix Divi | 22.48% | -20.98% |
| Satrix Rafi 40 | 18.97% | -8.49% |
| CoreShares Preftrax | 17.57% | 0.03% |
| CoreShares Divtrax | 17.13% | 0.49% |
| NewFunds Govi | 13.53% | -3.66% |
| NewFunds Shari’ah Top 40 | 11.02% | -18.28% |
| CoreShares Proptrax 10 | 10.42% | 13.15% |
Source: etfSA.co.za / Profile Media
In South Africa, the top performers last year were all very poor performers in 2015. So what makes an ETF, or a fund, endure such a reversal of fortune? Indeed out of the top 10 performers in 2016, only two of them produced a positive return the year before, or to put it another way, 8 of them would have lost you money in 2015.
Would this form of investment strategy be the same in reverse if we were to consider the best performers from 2015? In other words did they perform badly in 2016?
The table below shows the top performing ETF funds of 2015 together with their returns last year.
| ETF performance for 2015 and 2016 | ||
| Fund | 2015 return | 2016 return |
| Dbx-Tracker MSCI Japan | 45.44% | -9.04% |
| Dbx-Tracker MSCI USA | 33.21% | -3.98% |
| Dbx-Tracker MSCI World | 31.23% | -6.96% |
| Dbx-Tracker FTSE 100 | 22.30% | -15.10% |
| Dbx-Tracker EuroStoxx 50 | 21.98% | -12.48% |
| Standard Bank AfricaGold | 19.29% | -3.67% |
| NewGold | 19.26% | -3.79% |
| Satrix Indi | 16.71% | -9.15% |
| NewFunds S&P Givi Indi | 15.78% | -10.13% |
| CoreShares PropTrax 10 | 13.15% | 10.42% |
| CoreShares LowVoltrax | 8.48% | 1.40% |
Source: etfSA.co.za / Profile Media
So remarkably, the answer is yes to an extent. Eight of the top ten performers in 2015 had negative performance in 2016. Why?
One measure of consideration is currency. In 2015 the list of top performers was dominated by international ETFs that benefited from the big depreciation in the Rand. This was not the case in 2016, with the Rand becoming stronger against sterling and the dollar. So, should you be hedging currency based funds?
Well, that is a different argument as you would not have enjoyed the large benefits in 2015 if you had hedged currency.
For many years, at seminars that we have run, we have highlighted this “reversal of fortunes”.Evidence of this has been provided by Daniel Kahnman, and he refers to this as the “return to mean” of fund manager performance or sector outperformance.
The key is, if you are lucky to be in a stellar performer, to take your profits. The same is true if you are in a dud, make a stop-loss and get out! The real stars in the long term investors’ portfolio are those funds that outperform the average, and they do not have to be the best or top-quartile. The biggest lesson you can take from trying to chase performance is that it is a fool’s game.
Fundamentals leads to outperformance, not “Chartism” of this kind, and yet so many investors and advisers base their decisions on past performance, assuming that just because an asset class or strategy worked in one year it is a reason to invest- or indication of what will happen in the next.
Anyone who bases their 2017 investment strategy on what worked in 2016, from history, is unlikely to get 10 out of ten right, in fact they will be lucky to even get more than 50% correct. From the evidence here, which had been repeated in many annual cycles, anyone who invested in 2016 based on strong past performance in 2015 would have come out of the last 12 months very badly.
It is also worth pointing out that investing in the worst performers and expecting they will outperform is not going to be a successful strategy; this is not the case as some may continue to invest in areas where there are ongoing issues/problems or in companies that actually go bust.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
This article was published 19th January 2017
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