By Christo Luüs
It is a well-researched investment fact that most of the return associated with a diversified portfolio has to do with asset class selection—not share selection (also called stock picking). Part of this asset class selection or allocation involves so-called tactical asset allocation which in turn relies heavily on sector rotation strategies. The reasoning behind sector rotation strategies has to do with the fact that an economy moves in cycles and specific sectors and industries within the economy will most likely perform better in particular stages of the business cycle.
But the existence of such strategies and tactics does not entirely eliminate the question asked by many investors, namely how particular shares listed on the stock exchange have performed over time. Of course it is easy to state the obvious: Over any given time, there have been (and always will be) winners and losers. Another obvious statement is that it is extremely difficult to predict future winners and losers. However, one can form a fairly accurate picture of past winners and losers—if one has the data.
To get an idea of how wide the dispersion in terms of returns were over the past five years, we used McGregor BFA data on share prices, dividend payments and volatilities of individual shares listed on the JSE. Various winners (and losers) lists of JSE-listed shares could consequently be compiled.
Although there were 398 listed shares on the JSE in June 2015, only 319 of these counters were already listed in June 2010. These 319 shares were the ones for which five year returns could be computed.
The total return winning lists
The top 10 list of winners for all 319 shares over the past five years had an average annual return of nearly 74% p.a. (see Table 1). Share price appreciation and dividend payments were used to calculate total returns. The best performing share was Calgro M3 Holding Ltd—a mixed-use / integrated residential development company. An investment of R1,000 in this company in June 2010, would have grown by 114% per year to R44,987 in June 2015. And this company did not pay any dividends.
All of the top performing companies were relatively small-cap holding companies operating in the financial services, technology, business services and property development fields. Because of their relatively small size and perhaps limited number of issued shares, liquidity considerations could have placed some of these companies out of reach of especially large institutional investors. However, market capitalisation and liquidity conditions pertaining to shares were not considered in this report.
The top 40 companies’ top performing list over the past five years was headed by Naspers—no surprise there. Media, technology, industrial, medical, pharmaceutical, retail, financial services, and luxury goods manufacturing are some of the activities that these prominent “big achievers” are involved in. And these JSE giants are no doubt part of the portfolios of most asset managers, institutional investors and also small investors.
Considering the total return distributions of individual shares, most of the JSE listed shares’ returns were in the 10% to 20% range during the past five years. However, for all shares, 32% were negative (<0%), while 22.5% (i.e. 13) of the top 40 companies were in negative territory (see Graphs 1 and 2).
Risk adjusted returns lists
By now, most investors are aware of the fact that high returns often come with high risk. As mentioned before, liquidity risk can be a risk associated with small cap shares, although high performing small companies may pose less of a liquidity risk than poor performing ones. But all companies may be exposed to a multitude of business risks which could impact on their operations and “bottom lines” which are often quite difficult to measure and account for. And what is ultimately important—and more measurable—for the share investor is the extent to which a company’s share price is exposed to fluctuation.
There are various ways in which share prices can be adjusted for risk. A fairly straightforward method is to calculate the standard deviation of share price movements for a particular share over a period of time, eg. daily share price movements relative to the mean during a month. McGregor BFA does this volatility calculation—which they convert to an annualised figure—for all listed companies. In order to risk adjust a share’s returns, one can simply express its actual total return as a ratio of its annualised volatility. In essence, this then tells one how much return (p.a.) one could expect for each percentage point of risk (share price volatility).
Usually this ratio is the big equaliser in terms of performance measurement since high performing companies need substantial share price increases (i.e. high share price volatility) to propel their share prices to higher levels. The relationship between risk and return is shown in Graph 3. Tables 3 and 4 show the rankings for all shares and the top 40 shares respectively, based on risk-adjusted measurements. What is interesting to note is that the all share risk-adjusted ranking return list differs entirely from the total return ranking list. Naspers, which tops the lists for the top 40 shares in both the total return and risk-adjusted return rankings, was also in 10th position on the overall risk-adjusted list.
The worst performers
Some investors would perhaps be interested to know if they had succeeded in avoiding the worst performers list based upon total annual returns.
Table 5 shows this list. As was to be expected, this list is laden with resources companies which had succumbed to the weak global demand, low international prices and domestic production constraints and challenges which have plagued these companies over the past few years.
Of course African Bank (financial services) and 1Time (airline) are two well-known companies which have fallen from grace and which also made this list of shame.