SATRIX INVESTMENT PLAN CLIENT LETTER – QUARTER 2 OF 2012
DEVELOPMENTS IN THE GLOBAL ECONOMY
In the previous quarterly letter we noted the renewed appetite for risk with markets having moved from “risk off” to “risk on” during the first quarter of 2012 triggered by abating concerns over the Eurozone and improving global economic data. Equity markets accordingly had a good start to the year, with global markets having one of their best starts in recent history. However, as we also stated in the previous communiqué, the crisis in Europe is far from over. This became evident from the events in March and early April 2012; upsetting the state of relative calm that prevailed in the first quarter and causing renewed concerns about the Eurozone debt crisis. These renewed concerns, together with uncertainty with regards to the growth prospects of the USA and China, rising oil prices and lingering geopolitical unease in the Middle East resulted in a general correction of risky assets (risk aversion), and equities in particular, and a shift back to “risk off”. The South African economy continues to follow the trend set by the global economy and we saw currency weaken with the aforesaid increase in risk aversion.
THE MARKETS & THE PERFORMANCE OF THE SATRIX ETFs
South African equity markets generally held up better than the international equity markets. Looking at the performance of the South African equity markets for the second quarter of 2012, the All Share Index returned 0.98%. Financials were the top performers over the quarter with a 4.59% return followed by industrials which delivered a 1.58% return. Resources continued to underperform with a return of -3.34% over the quarter, reflecting the concerns over slowdown in China as one of the largest consumers of commodities. Market commentators still believe that resources offer value despite commodity prices remaining high.
To 30 June 2012, the Satrix Indi ETF is the top performing equity industrial sector unit trust fund in South Africa over 2, 3 and 5 years. Over the three years to 30 June 2012 the Satrix Indi ETF has delivered 25.91% per annum. The Satrix Divi and the Satrix Rafi continue to deliver good relative returns in the current market conditions with returns over the past three years of 22.22% and 19.58% per annum respectively. Turning to financial sector exposure, the Satrix Fini ETF delivered 20.20% per annum over the past 3 years.
The Satrix Swix ETF, offering large cap equity exposure to the same top 40 shares as those held by the Satrix 40 ETF but with a down-weighting to resource counters delivered a return of 17.70% per annum over the past 3 years. This performance puts the Satrix Swix ETF in the number three spot over the past three years out of all the large cap equity unit trusts in SA (and the second best performing fund over two years), followed closely by the Satrix 40 ETF in fourth place with 17.03% per annum to 30 June 2012. The Satrix 40 ETF however retains its position as the third best performing large cap equity unit trust fund in SA over 7 and 10 years to 30 June 2012, outperforming most of the actively managed large cap equity unit trusts. For more information on the past performance of each of the equity ETFs offered by Satrix please refer the quarterly factsheets on our website (www.satrix.co.za).
Comparing the performance of equities as an asset class over the past 7 years to other lower risk assets classes, fixed interest funds (bond funds) delivered 8.86% per annum on average and money market funds on average delivered 7.98% per annum. Real estate general funds delivered 17.39% on average over the past 7 years. Asset allocation funds (flexible funds) delivered on average 12.07% per annum over the past 7 years to 30 June 2012. As a proxy for the equity markets, the Satrix 40 ETF (a large cap equity fund) delivered 15.23% per annum of the aforesaid period.
WHEN IS THE RIGHT TIME TO START INVESTING?
The right time to start investing will always depend on an individual's particular circumstances, but research suggests that the longer you are invested in the stock market, the greater your chances of investing success. Investing early can benefit from 'compound growth' where your earnings are reinvested back into your original investment. This effect of compound growth is that over time your investment will have the potential to grow faster than the original investment alone. Of course, the value of investments will fall as well as rise from time to time and you may not get back all of the funds you initially invested if you sell prior to the markets recovering. This does not mean, however, that it is ever too late to start investing and, contrary to common belief, you don't need a large sum of money to start investing. Investing smaller amounts and often can make a significant impact on your long term returns.
RAND COST AVERAGING
It has been said that those investors who suffer the greatest losses are those who are constantly trying to get in and out of “hot” stocks and those who buy and sell according to the dips and spikes of the market. This is not only considered to be, on average, a non-profitable approach but it is also obviously a very stressful and time consuming investment approach.
The benefit of using ETFs to get exposure to the equity markets is that it is a lower risk strategy because the investor gets diversified exposure to a basket of shares (held by the ETF) rather than assuming the concentration risk associated with picking individual stocks. Secondly, a better option often suggested by professional advisors as an alternative to trying to time the market (by selling when you perceive the market to be high and buying when you perceive it to be low) is to adopt a systematic approach to investing. One such approach, and we have also referred to it before but it warrants further mention given current market conditions, is Rand cost averaging. Rand cost averaging can be a relatively stress free and an effective way to invest in the market.
This simple approach involves investing the same amount at regular intervals, for example a recurring R300 monthly debit order through the Satrix Investment Plan. Markets go up and they go down at unpredictable times and intervals; the advantage of rand cost averaging is that when markets are down you purchase more shares and when markets are up you buy less shares. Although this approach avoids the stress and potential pitfalls of attempting to time the markets, it does conform to the traditional advice of buying low and selling high (you buy more shares at lower prices and fewer shares at higher prices).
To give and example of how rand cost averaging works, let’s take the scenario of two different investors who want to invest in the equity markets. After choosing the fund that they want to invest in, the investors need to decide how much and how often they should invest. The one investor, investor A, decides to invest R400 per month (the example below is for illustrative purposes only; it ignores transactional costs and assumes that fractions of shares can be acquired):
- First month: Satrix Divi securities cost say R2, so the investor’s R400 buys 200 Satrix Divi shares.
- Second month: the Satrix Divi share price drops to R1.80 per share so the investors R400 buys 222.22 Satrix Divi shares.
- Third month: the Satrix shares price goes up to R2.20 per share so the investors R400 buys 181.82 Satrix 40 shares.
At the end of the third month the investor has invested a total of R1200 and would own 604.04 shares worth R1329. If this position is compared to an investor, investor B, who bought R1200 worth of shares in the first month, investor B would have bought 600 shares (therefore acquiring less shares with the same amount having been invested than the investor who invested a fixed amount monthly over the applicable period), which would be worth R1320 in month three. Obviously market conditions fluctuate unpredictably and the approach will be followed over an extended period and not only a couple of months but the example demonstrates how Rand cost averaging can be an effective strategy.
The approach makes investing convenient without you having to worry about the rise and the fall of the market. When market conditions appear weak it is easy for investors to lose confidence and disinvest rather than sticking to their long-term investment plan, as a result they may have sold out at a loss. Rand cost averaging allows you to benefit from each market downturn; as the market drops you know you are buying more shares. The technique requires no guessing about when the market may or may not turn around.
Satrix Managers (Pty) Ltd www.satrix.co.za
Call Centre contact: 086 110 0670 Call Centre fax: 011 388 8558
Call Centre email: email@example.com
Satrix securities are listed on the JSE Limited and the trading of participatory interests on the Exchange will incur trading and settlement costs. The price at which a participatory interests trade on an exchange may differ from the price at which the manager repurchases participatory interests. As with all stock exchange investments, the market price of Satrix securities will fluctuate according to market conditions, general sentiment and other factors. Collective Investment Schemes in Securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. CIS products are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from the company/scheme. The information contained in this letter is provided for general information purposes only and does not constitute financial or any other professional advice. Satrix Managers (Pty) Limited accordingly accepts no responsibility for any loss and/or damage whatsoever which may arise from the use of and/or reliance on any information contained herein.