ALUWANI’s domestic equities investment and portfolio construction process is benchmark cognisant and aims to generate risk-adjusted returns over any client chosen benchmark index over time. We do not only focus on chasing returns, but we are equally aware of the risks we are taking in pursuit of such returns, i.e. benchmark relative risk. Being benchmark cognisant also means that our process is scalable as we can leverage our stock selection views and construct portfolios that aim to exceed client expectations.

It is therefore important as investment professionals to understand the characteristics of each benchmark that we are being measured on, equally so for the end client to do likewise, especially since of late these varying indices have experienced material performance divergence.

1. As can be seen below, performance diversion was particularly stark for the one year ending 30th April 2019, where the best-performing equity index was almost 5% vs the worst at almost negative 2%, a 7% variance! Over a slightly longer period of 3 years, the variance equates to 4%. Based purely on benchmark choice, an index tracker investor who chose Capped Swix would have lagged the other tracker investor who chose Top40 by 4% per annum over three years. It would also be unlikely that stock selection through active portfolio management would have made up for the difference in these benchmarks without taking material active positions. For instance, any active position placed on the benchmark would have to contend with the sizable difference in the Naspers weight between the indices. As of 30 April, the weight of Naspers in Top 40 was 25%, compared to 11% in Capped SWIX.
2. The same argument can be done from a risk perspective. Defining risk as the standard deviation of active returns (or tracking error) we can see that there was substantial tracking error between the various indices. The deviation in active returns between Capped SWIX and SWIX 40 was as high as 6.7%!

3. Equity risk premium is the compensation required by equity investors not to be invested in risk-free yielding assets, such as guaranteed government bonds. Textbook and conventional thinking suggests that a measure of this risk premium is the difference in earnings from equities vs bonds and over the long term this has been calculated at around 4,5% extra earnings (premium) equity investors would need to earn in addition to bond yields, to be indifferent between the two asset classes. From the chart below, the few odd times such conventional thinking held true was during the global financial crisis where such differential was approximately 7%, i.e. equity investors being more than adequately rewarded for investing in equities vs bonds. Since then, this conventional relationship has been inverted, and upon closer inspection, the sad reality is that the domestic equities market has not generated enough earnings despite positive returns, and that is largely due to price expansion (in the hope of earnings to come, but still remaining elusive).


Perhaps it is now opportune for investors to approach the South African domestic listed equities more from a stock selection point of view as opposed to it being an asset class, with an absolute return and volatility targets as desired outcomes. Even though at ALUWANI our process is benchmark cognisant, we appreciate and accept that none of our benchmarks are ‘perfect’. For investors, over and above taking risk by investing in equities (without the appropriate reward, as shown above), why take additional risk by selecting one benchmark vs another especially since the differences can be this stark?

More articles

Why the FED has changed its tune

26 March 2019

by Conrad Wood - Head of Fixed Income Strategies

Post Budget Review by Bafana Patrick Mathidi

21 February 2019

Going into the National Budget for the 2019/2020 Fiscal Year, the odds of a balanced-all-pleasing outcome were already stacked against South Africa’s Finance Minister Tito Mboweni.

SA Equities 2018 roundup and outlook for the year ahead

29 January 2019

By: Bafana Patrick Mathidi Asset class returns in perspective Much has been said, to the point of near despair about broader investment returns for the year 2018. It is most useful to have a broader perspective when reviewing financial asset class returns, to this end long run history and a comparison to the broader universe of investible financial assets is most informative, as opposed to just a 12 months performance review. Read More

ALUWANI's Approach to Naspers

11 July 2018

Naspers continues to be topical in the broader domestic investment community given its sheer market capitalisation and weight in the various JSE benchmark indexes and contribution to volatility.

How vulnerable are South African bonds to a change in global financing conditions?

13 June 2018

Daring financial experiments continue to yield unprecedented results as the Global Foreign Investor Market brings about change, global liquidity, capital gain and a far more developed world of finance for RSA. The month of May brought along a surprisingly fruitful soar in the sale of foreign investment bonds, and has sparked the attention of “yield searching” investors around the globe. The market isn’t resting on its laurels as investors are getting in on the sporadic investment opportunities gifted to them. It has resulted in more than R30bn worth of investment bonds being sold across the curve—the highest rate of foreign investor bond selling on record. Foreign liquidation threatens our country’s bond and currency market. But should South Africa continue the tight rope stride in pursuit of gaining a much higher structure of economic growth and development?

Copyright © ALUWANI Capital Partners eSwatini (Pty) Ltd. 2018 Registration no. 665 of 2016 | An Authorised Financial Services Provider (FSRA No. IA/025/18)