Business Challenges in 2015 – A divergence in markets and the SA Retail Distribution Review – Part 2

Last week I talked about two profound challenges that our industry will face in 2015: firstly, to collaborate with the FSB in reviewing and implementing the 55 proposals introduced by the FSB’s framework for South Africa’s Retail Distribution Review (“RDR”) by 2016. At the same time, we potentially face a large divergence in the performance of asset classes/sectors/currencies, both locally and globally. Both of these challenges will ultimately test our industry in 2015 and beyond.

Last week, in part 1, I discussed the RDR proposals and the need for us all to engage with the RDR process. This week, in part 2, I will discuss the second challenge: that of market divergence.

Challenge 2: Divergence in performance

I will keep this short. Please study the three line graphs above and take note of the following:

1. Over the past year the divergence between Equity sectors on the JSE continue to widen – and the average equity manager is struggling to keep up with the market on a relative basis.
2. Over the past year the divergence between Equity ETFs/Index Funds available to investors continues to widen: so you thought the best alternative to counter manager risk is to buy the market? Which one do you use in the future?
3. Over the past year the divergence between fixed interest asset classes and listed property continued to provide upside potential to Flexible Fixed Interest Managers – and the average manager is suffering on a relative basis by only adding 0.33% over STEFI (Best Cash Rate).

Any one of these examples meant that active decisions may have made a difference of between 4-12% in absolute returns over 12 months.

Is this too much food for thought before the festive season? I am happy to hear other views on this subject, so please feel free to contact me if you would like to share your thoughts.