Rowan’s quarterly round up for end May 2011 put the finger on the button when it comes to volatility in the global markets. His PIGS (Portugal, Italy, Greece and Spain) contagion really came home to roost in August with even US Treasury Bonds taking an early rating knock from Standard and Poor’s. The uncertainties have been palpable, unpleasant and unpredictable. Reminds me of the anonymous quotation … “An economic forecaster is like a cross-eyed javelin thrower: they don’t win many accuracy contests, but they keep the crowd’s attention”.

Our attention has been as focussed as ever on the merits of diversification – across regions, asset classes, currencies and investment styles. In the February 2011 Finlaw Review I drew attention to the trend of local fund management companies shifting their focus to international shares. Not too many “cross-eyed forecasters” on their panels – so far [admittedly short-term] their views have proved correct. The graph depicts the main global indices and includes the South African ALSI – the pink line. It shows the August dip rather well and the fact that there were sharp recoveries across all markets in the closing week of the month. Europe had an impressive bull run in the first part of the year – but as can be expected from the turmoil in that region, it was punished the most by fearful investors. The uncertainty in that region continues – but two important things to remember … their top companies’ trade globally so are less dependent on Eurozone economics and any weakening in the Euro currency will make their exports to other regions [notably China and India] cheaper.

Our own economy has not been helped by the conflict within our governing party. Our business confidence index has dropped again this year. The GDP results just announced for the second quarter of 2011 [1.3%] were well below expectations and it is clear that the country has no hope of achieving the annual growth rate targeted for 2011. If you remove the contributions of government spend from GDP – you are left with 0.1% being contributed by the private sector! Both the Manufacturing and Agricultural industries are in negative territory and heading for recession. It seems that some of our compatriots are unaffected – cartoon courtesy of www.wonkie.com !!!

Risk and Return …

Our work on R&R [the above – not “rest and recreation”] often throws up some excellent examples of how these two “R’s” interact. Here is one from a range of local Coronation Funds. The chart on the left shows their performance in the bull-market run from 6^th March 2009 to end May 2011. The blue line represents their pure equity [or listed shares] fund [the most risk] through to the burgundy line which is their money market offering [least risk]. The lines in between are two of their balanced funds – the Balanced Plus and the Balanced Defensive. The Scatter Chart on the right shows the same funds with risk increasing as you move left to right and returns increasing as you rise vertically.

You can easily see the volatility differences [up and down movements] in the chart on the left. The Equity Fund provides a fair roller coaster ride – while the Money Market simply climbs steadily. Of course we are seeing these in ideal share market conditions, so here’s another snapshot taken over the past 4 years ended 31 August 2011 and covering the global market collapse of 2008. You will see that it took shares about 3,5 years to recover the returns that cash had provided over this period – and then shares turned South again in the recent turmoil. This all proves the point that short-term investing needs low risk products while the only way to achieve superior long-term returns is to take more risk.

Please don’t hesitate to contact Rowan or myself if there is anything we can do for you about your existing or planned investments.

Kind regards

John Wallace – September 2011.