By Joseph Nelesen, Senior Director, Index Investment Strategy, S&P Dow Jones Indices
A clever (but unlucky) character once said, “Chaos is a ladder.” Indeed, the first half of 2022 was filled with chaos in many major markets, including South Africa; our last SPIVA South Africa Dashboard for the region shows where the rungs were slippery and where active funds were able to rise faster.
Overall, the rate of underperformance of actively managed South African equity funds during the first half of 2022 was well below recent full-year measures (see Exhibit 1), with nearly two-thirds outsideperforming the S&P South Africa 50.
Avoiding a small number of underperforming stocks had the potential to make a big difference. Within the S&P South Africa 50, 49% of stocks underperformed the benchmark and 51% outperformed, but only a few stocks contributed the majority of the index’s return in the first half of -6, 3 %. Luxury goods company Compagnie Financiere Richemont SA (CFR) and communications company MTN Group Ltd. (MTN) combined to account for two-thirds of the index’s total decline. As the largest weight in the index and the second worst performer during the first half, CFR had the most significant impact on benchmark returns (see Exhibit 2).
Returns were not “normally” distributed, creating an interesting challenge for stock pickers. the median The return on shares of the S&P South Africa 50 was -5.1% in the first half, close to the performance of the index, but the (unweighted) average the stock return was 0.3%, due to strong outperformance from a minority of big winners. In fact, top performers averaged a 23% excess return, while underperformers averaged -11% return. Even excluding an outlier with an excess return of more than 200% in the first half (and an index weight of less than 1%), the average excess return of the other outperformers was 16%. In other words: a manager’s chances of choosing an underperforming or outperforming stock were about equal, but the outperforming stocks were disproportionately rewarding for performance.
Based on the relative performance of the S&P South Africa 50 Equivalent Weight Index, moving away from mega-cap names may have been a way for active managers to navigate a successful H1. The equal-weighted index outperformed the capitalization-weighted S&P South Africa 50 by 1.5% during the first half and, in a perhaps positive sign for full-year results, has continued to spread by an even wider margin since then. (see Annex 4). .
Reducing the weights of the largest stocks in the benchmark index remains a predominant active management strategy, and one that may have benefited active managers in South Africa in the first half of 2022. So how did it fare? active managers on a risk-adjusted basis? To find out, you’ll have to dig into SPIVA South Africa’s 2022 Mid-Year Scorecard. (Spoiler alert: some results are very different!)
Publisher’s note: The bullet points in this article were chosen by the editors of Seeking Alpha.