Why your manager probably lagged the market last year

Most active fund managers struggled to keep up with the South African stock market's return of more than 40 percent last year, according to recent research released by Morningstar.

Fund managers chose to stay more diversified and not chase the good returns delivered by a concentrated part of the market, they told the Investment Forum, a leading investment industry event hosted by the Collaborative Exchange  in Cape Town and Johannesburg over the past week.

Precious metals led the charge

According to three leading equity managers, 2025’s gains were driven by a small cluster of shares, mainly in the precious‑metals mining sector, and especially gold. This created what they said was “an unusually narrow market” that rewarded concentration rather than diversification.

“Only 21 percent of stocks listed on the JSE actually outperformed the market… The ‘South African Magnificent Seven’ — the precious‑metal miners — did 200 percent-plus, while the rest were left in the dust,” Leonard Kruger, portfolio manager at M&G Investments said.

Kruger says 2025 was a complete outlier in the past 25 years and while active managers, who look for opportunities in a much more diversified market, did not lose money, it was also hard for them to keep up.

“2025 was a cracker for the index because it doesn’t care about risk control, whereas the whole [investment] industry tries to manage risk,” Rob Spanjaard, chief executive officer and chief investment officer at Rezco Asset Management, said.

Passive funds don’t assess risk; they mirror the market. When the market becomes highly concentrated, they benefit by default, he added.

Few fund managers are willing or permitted to take the level of risk that would be required to invest as heavily in the small group of companies that drove the market last year.

Most managers lagged behind

Michael Dodd, manager of selection services at Morningstar, said Morningstar’s recent Morningstar Active Passive Barometer Report showed that only 10 percent of actively managed South African equity managers outperformed the average returns achieved by passive funds last year.

The 119 actively managed equity funds achieved a strong average return of 36.4 percent while the 41 passive equity funds achieved an average return of 44.8 percent, the report shows. 

1-year	119	41	36.4%	44.8%	10.1%
3-year	121	47	18.2%	19.5%	24.8%
5-year	124	52	17.7%	17.5%	40.3%
10-year	124	36	10.3%	11.6%	12.9%
Source: Morningstar South African Active / Passive Barometer 2025
ACTIVE FUNDS OUTPERFORMING PASSIVE
Period	Active  funds	Passive funds	Active funds Asset- weighted Returns	Passive funds Asset- weighted Returns	Percentage of active funds that outperformed passive funds

These average returns are calculated using weightings in line with the amount invested in each fund (asset-weighted)

Spanjaard pointed out that in 2024, 80 percent of active managers beat the index. 

Why managers didn’t chase leading shares

Wim Murray, portfolio manager at Foord Asset Management, says that the FTSE JSE All Share index (Alsi) that local passive equity funds track, reflects the fact that South Africa is a resource-rich country. This brings greater volatility. After a year like last year when resources shares have done well, investors in index-tracking funds end up with a bigger weighting in their portfolios. However, they also face a much greater risk of the price of the shares they are heavily exposed to falling, than a year ago.

Murray said resources shares make up 30 percent of the Alsi now compared to about 10 percent for the leading world index, the MSCI World index, and five percent in the leading US index, the S&P500 index.

Mikhail Motala, equity portfolio manager at PSG, said without active management, the PSG SA Equity Fund would have done four percentage points better last year, but it would have ended the year with 15 percent of the portfolio in platinum group metals (PGMs). At this point in the cycle, you want to be counter-cyclical, he added. Index positions and moves are cyclical.

Positions differ

Dodd pointed out that Rezco’s equity fund had no exposure to resources shares. Spanjaard said the manager prefers companies that get more valuable and compound every year, like Capitec or Standard Bank.

Spanjaard said Rezco does not see precious metal miners compounding. A chart in dollars of one of the largest gold miners, Gold Fields, shows the share went nowhere over 50 years, he said.

Motala said whilst it is true that over the past 50 years diversified miners have not compounded, there has been an inflection point – a dearth of supply of minerals, miners’ cost bases have changed and inflation is stickier.

He said PSG had been underweight in the PGM miners relative to the index in 2024 but after researching the sector it decided there was an investment case: because issues around demand related to electric cars were so top of mind, no one was factoring in an unfolding supply gap.

Murray said he agreed that the demand had been overemphasised at the expense of supply but he said Foord had a small position in resources shares because their prices were influenced by fickle retail investors who could sell out.

Spanjaard agreed saying retail investors are dangerous, weak holders of these shares making them very risky. He said managers do not know if the gold price will double or halve.

Kruger said M&G typically has not held gold but changed its view in 2022 and 2023 as there has been a change in the gold market that is underappreciated by investors globally.

He said while no one can call the gold price, he knows the valuation of a miner like Anglo Gold, that it will generate a R100 billion cashflow this year that it cannot allocate and that it will return money to shareholders. He was therefore happy to own the share.

Why precious metals performed so strongly

South Africa, as a major mining country, benefitted from a global trend last year when the demand for critical minerals surged due to global geopolitical tensions and competition for secure supplies, Unathi Loos, a portfolio manager at M&G Investments, explained.

Loos warned, however, that while the sector is currently benefiting from strong prices in certain resources, commodity cycles are volatile. Prices can move far from the cost of removing resources from the ground, she said.

Investing long‑term requires careful risk management and not just a focus on short-term price spikes. Long-term investors should focus on where demand will be in 10 years and where prices are likely to be in 10 years. Some projects take up to 15 years to bring to fruition, she added.

Market capitalisation indices, however, will reflect price movements and the composition of the resources shares in the index will respond to commodity and business cycles as demand and supply of resources changes, Loos said.

Coal was in demand as a result of the Russian Ukrainian war, PGMs were in demand for electric cars, gold is in demand as a safe alternative to the US dollar and US treasuries, while copper is in demand for artificial intelligence, the conference heard.

Loos said while there are cycles within cycles, there is currently a structural change – the need to secure critical minerals, that is supporting higher metals prices.

What this means for your investments

Last year’s market performance and the performance of the funds that track it was exceptional, but it was also unusual. Investors should be aware that:

• Active funds will have underperformed the index

Active funds will have underperformed the index because they were more diversified than the index.

Their role is to balance returns and risk — not to chase sector-specific booms.

• Passive funds are exposed to the commodities cycle

Passive funds may have as much as 30 percent in resources shares, which worked in 2025, but it may expose you to the risk of investment values falling if the commodities cycle turns.

Diversification remains a powerful long‑term strategy. Index-trackers may deliver over long periods but will have periods of better and worse performance, as their concentrations in different market sectors are in or out of favour.

The demand for critical minerals should ensure the resource sector continues to deliver good – but volatile – returns for South African inavestors.