S&P Dow Jones Indices has been the de facto scorekeeper of the ongoing active versus passive debate since the first publication of the S&P Indices Versus Active (SPIVA) U.S. Scorecard in 2002. The SPIVA South Africa Scorecard measures the performance of actively managed, South African equity and fixed income funds denominated in South African rands (ZAR) against their respective benchmark indices over one-, three-, and five-year investment horizons.
MID-YEAR 2018 HIGHLIGHTS
The stock market rally in South Africa in 2017, buoyed by loosening monetary policy and new leadership expectations, failed to extend into 2018. The S&P South Africa Domestic Shareholder Weighted (DSW) Capped Index was up 7.6% year-over-year in June 2018, yet it was down 6.0% from the start of the year.
When comparing South African active equity fund manager performance to the capped benchmark over the one-year period, 51% failed to outperform. However, the asset-weighted performance of the category outperformed the same benchmark by 70 bps. This suggests larger funds may have benefited from their increased exposure to the largecap stocks that contributed most to market returns. Interestingly, 77% of active funds from the same category failed to outperform over the five-year period.
The strengthening of the South African rand in December 2017 in anticipation of Ramaphosa replacing Zuma as leader of the ruling African National Congress was short-lived. After the euphoria, the reality of the task ahead set in, and the U.S.-China trade war further exacerbated the local challenges facing the president. The GDP was revised to fall 2.6% on an annualized basis in the first quarter—the sharpest contraction in almost a decade. The subsequent 0.7% drop in the second quarter put the country in a technical recession.
The South African rand weakened through Q2 2018 alongside other emerging market currencies. From the perspective of a local investor, the depreciation contributed to higher returns offered across international markets. The S&P Global 1200 increased 16.7% in local currency terms between June 2017 and June 2018.
South African active funds investing in global equities underperformed by 3% on an assetweighted basis, and 82% of funds were unable to beat the S&P Global 1200 within the same oneyear period.
In an attempt to tackle the country’s rising debt, value-added tax (VAT) was increased 1% in South Africa earlier in 2018. Meanwhile, S&P Global Ratings affirmed South Africa’s sub-investment grade credit rating and kept its outlook stable with ‘BB’ and ‘BB+’ on its foreign and local currency debt, respectively. However, it was noted that the ratings could be lowered if the rule of law, property rights, or enforcement of contracts were to weaken. Hence, the controversial, populist policy of land expropriation without compensation has many concerned it will erode trust and dampen foreign investment. The S&P South Africa Composite Property Index fell sharply at the start of the year; the index was down 18.7% (in South African rands) over the first half of 2018.
The SPIVA South Africa Scorecard also covers the performance of actively managed fixed income funds that manage short-term bonds or diversified and aggregate bonds. In the one-year period ending in June 2018, short-term fixed income funds predominately outperformed the South Africa Short Term Fixed Interest (STeFI) Composite, with just 13% underperforming. These results are fairly typical for the group, since the benchmark does not reflect the opportunities available to fixed income managers through the corporate bond markets. Over the same 12-month period, 70% of active funds in the Diversified/Aggregate Bond category were unable to beat the S&P South Africa Sovereign Bond 1+ Year Index, which rose 10.1% (in local currency terms).