Performance review: NewFunds MAPPS Protect has not been able to fulfil its promise of preserving the purchasing power of its investments. While the fund has done a good job for its longer-term investors, those who invested three years ago have seen their investments being eroded by inflation. The fund returned 3.78% and 4.67% a year over the past year and three years respectively. With inflation averaging 4.54% during the 12 months to end-August and 5.03%/year over the three years to end-August, it means real returns have been negative.
The fund’s performance could have been worse if it wasn’t for its investments in nominal bonds. The Govi index returned 9.71% over the past 12 months, with much of that growth being realised after the downgrade of SA’s credit ratings. Oddly, foreign investors continued piling into South African bonds after the announcement of the downgrade in April this year, helping the bond market. Normally when a major credit agency cuts a country’s credit rating to junk status, bonds don’t respond by rallying. However, low yields in the US saw foreign funds flowing into emerging markets.
What it does: NewFunds MAPPS Protect replicates the total return performance of South African equities through the SWIX 40 index; nominal bonds through the GOVI index; inflation-linked bonds through the ILBI Index; and cash. The cash component is held in hard cash or allowable money market instruments. The portfolio targets the following asset allocation: equities 40%; nominal bonds 15%; inflation-linked bonds 35%; and cash 10%. It may, however, deviate from that between rebalancing periods that are done on a quarterly basis.
Outlook: The equities holdings of the fund are dominated by consumer goods & services, health care and financial stocks. These stocks depend on economic growth prospects, locally and globally, for growth. Locally, the recessionary economy is not the only concern. Tension is rising as the battle for the ANC presidency heats up. These issues are likely to continue fuelling uncertainty and stock market volatility in the short term. Apart from heightened tensions over North Korea’s nuclear programme, global growth prospects are more encouraging with most developed markets reporting strong economic data during the first half.
Half of NewFunds MAPPS Protect’s funds are invested in nominal and inflation-linked bonds. Inflation-linked bonds thrive when investors expect inflation to rise. However, this doesn’t seem to be the case in the short term. Nominal bonds, in contrast, derive the bulk of their value from changes in interest rates and do well in an environment with low interest rates. Other factors that affect the value of both inflation-linked and nominal bonds include the credit profile of the issuer, liquidity, maturity profile, inflation level and interest rates (real interest rates in the case of inflation-linked bonds).
The credit profile of our government has deteriorated markedly since the end of 2015. SA’s hard currency sovereign credit rating was downgraded to junk by two international rating agencies in the first half of the year and the political environment remains uncertain.
Suitability: NewFunds MAPPS Protect is suitable for investors with low risk tolerance, such as those nearing retirement or who prefer a stable income stream. The fund can also be used to supplement retirement savings.
Top holdings: The top 10 holdings are dominated by bonds, all of which have duration of more than seven years. Naspers accounts for 11% of the fund.
Risks: Because of its diversity, the ETF is considered to carry moderate risk over the medium to long term. The value of the ETF will rise and fall, tracking the underlying securities and as such investors’ capital is not protected.
Fees: MAPPS Protect is one of the cheapest funds on the market. It charges an average of 16c/year for every R100 invested.
Alternatives: Investors with a slightly higher appetite for risk but wanting exposure to a diversified portfolio may consider NewFunds MAPPS Growth. It is more aggressive than MAPPS Protect, allocating about 75% of its funds to equities
Background: Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) are passively managed investment funds that track the performance of a basket of pre-determined assets. They are traded the same way as shares and the main difference is that whereas one share gives exposure to one company, an ETF gives exposure to numerous companies in a single transaction. ETFs can be traded through your broker in the same way as shares, say, on the EasyEquities platform. In addition, they qualify for the tax-free savings account, where both capital and income gains accumulate tax free.
Benefits of ETFs
- Gain instant exposure to various underlying shares or bonds in one transaction
- They diversify risk because a single ETF holds various shares
- They are cost-effective
- They are liquid – it is usually easy to find a buyer or seller and they trade just like shares
- High transparency through daily published index constituents
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