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By David Bacher*
Despite the continuation of the pandemic, the looting, and the power disruptions, 2021 was nothing short of an exceptional year for most investors. ‘Exceptional’ may sound a little dramatic but when comparing 2021 with the previous 15 years, we think not.
Here is why…
The ASISA High Equity Category
Let’s start by looking at the return of the ASISA High Equity Category. At Corion, we believe that this category arguably provides the best indicator for what the average person should have expected to see when reviewing their retirement fund statements for last year. All funds in this category comply with the retirement fund regulations, thereby ensuring a reasonable degree of diversification between asset classes and underlying instruments, but generally maintaining a high (but not more than 75%) allocation to equities.
As shown below, the average retirement fund grew by 20.3% for the year. Approximately 15% ahead of inflation. This is the best return since 2006 (23.6%) and 12% above-the-average return this category has provided over the past 15 years.
As local equities make up a significant portion (generally between 40% and 50%) of a High Equity Fund, it is unlikely that a retirement fund can have an exceptional year without our local equities doing well. 2021 was no exception to this rule.
The South African FTSE/JSE All Share Index delivered a return of 29.2%. This was the second-best year when compared to the past 15 years. What was particularly pleasing about last year was that unlike previous years, the market appreciation was broadly synchronised. Over the last 12 months, the FTSE/JSE FINI15 (the 15 largest financial companies) returned 27.4%, the FTSE/JSE RESI10 Index (the ten largest resource companies) returned 32.4% and the FTSE/JSE INDI25 (the 25 largest industrial companies) returned 24.45%.
This often under-researched segment of the market has been the laggard for many a year. Over the preceding four years (2017 to the end of 2020), the FTSE/JSE Small Cap Index produced a cumulative negative return of -15.9%.
However, following all the dooms-day rhetoric of investing in small local businesses over the previous years, small caps was undoubtedly the place to be in 2021. Driven by corporate activity and the market finally realising that there was exceptional value to be unlocked, small caps delivered a return of almost 60%. To put this in context, no local equity market segment when measured by market capitalisation size (i.e. Large, Mid or Small) has provided a return higher than this since 1999 when the ALSI Top40 appreciated by a massive 79.2%.
Nedbank’s announcement that they deemed Preference Shares an inappropriate part of their capital structure – resulting in them repurchasing all their preference shares – was a major catalyst for the Preference Share market. This event, coupled with attractive valuations and increasing interest rate expectations, was the perfect mix to send preference shares through the roof.
Although preference shares are a small and rather illiquid part of the market, the extent to which they rallied warrants a mention. For an interest-bearing instrument, a return of 44% was beyond most people’s expectations.
Inflation Linked Bonds (ILB’s)
The South African All-Bond Index, which mainly comprises of fixed coupon paying bonds, provided a respectable return, ending the year 3.6% ahead of cash. Its lesser-known cousin, Inflation Linked Bonds, which comprises of instruments with coupons linked to the inflation rate, provided a significantly higher return. Rising inflation expectations meant that real yields compressed by almost 100 basis points. When yields go down, bond prices go up.
These events, and the significantly higher duration of inflation linked bonds, resulted in ILB’s providing an exceptional return of 15.5%.
It is for these insights provided above, that Corion Capital believes it is not exaggeration to say that last year was an exceptional year. A year for South African investors to remember.
- David Bacher is the Chief Investment Officer of Corion Capital (an Authorised Financial Services Provider). Corion is driven by a desire to simplify the world of investing and manage a broad range of multi-strategy funds.
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