Don’t bet on last year’s star performers

Whether it’s Formula 1’s four wheels or the two wheels in MotoGP, I absolutely love motorsports. Many readers may point out, however, that motorsports have become boring in recent years, mainly because the previous week’s winners (usually Lewis Hamilton or Marc Márquez) typically end up winning the following week’s race as well. To date, between the two of them, they have won more than half of this season’s races.

What are the chances of someone ever beating Mercedes in a Formula 1 race again? Well, when we take a look at this sport’s history, we’ll find good reason not to bet all our money on Mercedes dominating Formula 1 for the next five years. McLaren dominated the sport until 1991 with Honda, after which Williams dominated for the next five years with Renault.

In the early 2000’s, Ferrari took the lead for more than five years, followed by Red Bull’s (Renault) nearly five-year dominance in 2010. Mercedes may have dominated the last five years, but does this give us 100% certainty that they will be able to do it for the next five years? Absolutely not.

Unfortunately, many investors use the same approach when it comes to their personal investments. It doesn’t matter whether it’s a country, a fund or a specific share, the fact that certain investments may have dominated the markets over a certain period of time, doesn’t necessarily guarantee its future success.

Let me explain based on some quotes I have heard recently:

“The USA has dominated markets in the past 10 years, and it will continue to do so over the next 10 years”

I would like to point out again, that it isn’t wise to recommend to someone that they sell all their South African investments and invest that money in the USA, or any other specific country for that matter. Make no mistake, the USA has been a brilliant investment destination over the past 10 years, but investors tend to forget that in the preceding 10 years, more specifically the period between May 1999 and May 2009, the US didn’t only fail to deliver growth in Rand-terms, but actually delivered negative growth for 10 years. For 10 years! Diversification between South Africa and the USA over the past 20 years would have been a much better option.

Let’s test this theory. Let’s suggest that – for  each calendar year since 2012- you invested in the previous year’s top 10 best-performing countries (of the 44 available which offer index funds).

The first comment would come as no surprise – you wouldn’t have invested in South Africa since 2012. More importantly, by investing in the previous year’s top 10 winners, you only would have managed to outperform the average returns of MSCI All Country World Index (ACWI) in two years.

Graph 1: Top 10 best-performing countries of the previous calendar year vs. MSCI All Country World Index (in US$)

If you had invested $100 at the beginning of 2012, and had spread your capital evenly between the previous year’s top performing countries every year, your investment would have been worth $122 as at the end of August 2019, while an investment in the ACWI would have seen your capital grow to $183.

“Just withdraw all your money from that fund!”

It may be important to do proper homework around the fund managers to which you will be entrusting your hard-earned money, but it’s just as important not to jump between funds constantly.

Table 1: Average returns of the top 10 best-performing SA General Equity Funds in the following year compared to the FTSE/JSE Al Share Index (source: Morningstar & Iress)

Let’s use the South African General Equity funds as an example here. Most of these funds use the FTSE/JSE All Share (JSE) as benchmark. Over the past five calendar years (since the beginning of 2014), the top 10 best-performing funds have managed to outperform the JSE in that particular year, every year.

But if you had invested in the previous year’s best performers over the same period, you only would have managed to outperform the JSE 20% of the time. It hits even harder when you look at the returns. If you had invested R100 in the JSE at the beginning of 2015, it would have been worth R127 as at the end of August 2019. If you had distributed your R100 investment evenly between the previous year’s top 10 best-performing funds over the same period, your investment would be worth only R106.

“But shares are different. The big guns got even bigger”

There is definitely some truth to this statement. Momentum and large cap companies have certainly proved themselves on a year-on-year basis over the past few years. But those who focused only on the previous year’s winners, would have paid the price for it. If you had invested in the top 10 best-performing shares chosen from the top 40 largest companies listed on the JSE at the end of 2009, your investment would be summarised as follows:

The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.


Schalk Louw

As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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