Time to Keep a Cool Head
Most investors have been disappointed with returns over the past three years which is completely understandable considering that the average SA Multi-Asset High Equity Fund posted a 3.4% return per annum over the three years ended March 2018. This is well below market expectation, past performance numbers and returns received from cash. While disappointing, this is not surprising given that the available primary investable asset classes have delivered low returns over this same period. The below table shows the annualised returns from the primary asset classes over the three years ending March 2018:
|
SA Equities [ALSI] |
5.1% |
|
SA Bonds [ALBI] |
8.6% |
|
SA Cash |
7.2% |
|
Listed Property [SAPY] |
-0.5% |
|
Offshore Equities [MSCI ACWI, ZAR] |
7.3% |
|
Offshore Bonds [Barclays Global Aggregate, ZAR] |
2.4% |
|
Offshore Cash [US Libor, ZAR] |
0.00% |
|
SA Inflation |
5.8% |
Source: Bloomberg, Investec Asset Management as at 31/03/2018. All returns are gross of fees
As you can see from the above table, four of the seven asset classes have produced a negative real return [absolute return less inflation – displayed in RED] The traditional engines of portfolio growth, equities [local and offshore] fell below 10% per annum over this period. In global equities [despite delivering above-inflation returns in dollars] the strengthening in the ZAR eroded returns for local investors. Despondent investors have questioned why they should stay invested; the answer is simply because history shows us that a negative real return from equity markets over the short-to-medium term is not uncommon and over the long-term equities remain the primary driver of investor’s wealth. Over the last 27 years [since the start of 1990], the local equity market delivered a return of 13.9% p.a. [per annum], well above inflation of 7.4% over the same period. We are aware that many investors [particularly those that draw an income] may not have a 27-year time horizon and so below I have included a graph depicting the three-year annualised nominal return on the FTSE/JSE All Share Index minus the three-year annualised inflation.
Source: Bloomberg as at 31/03/2018
The average real return of all three-year periods was 8.4% p.a. There were several periods where investors experienced negative real returns over the medium term. Investors have had to tolerate negative real return periods, to enjoy the long-term benefits of equities. The average real return [p.a.] over the three years following all negative three-year periods is 13.7%. The table below depicts the real return profile of the ALSI over all three-year periods since January 1990.
|
Average real return [p.a.] over all three-year periods |
8.4% |
|
No. of three-year periods receiving negative real returns |
72 out of 268 |
|
Percentage of all three-year periods that real returns were negative |
27% |
|
Average real return [p.a.] over the three years following all negative three-year periods |
13.7% |
|
No. of periods receiving negative real returns three years after a negative three-year real return period |
4 out of 72 |
Source: Bloomberg as at 31/03/2018
It is important to remember that there will always be periods of underperformance. It has happened 27% of the time over all three-year periods from 1990. Markets are volatile by nature but have rewarded persistent and patient investors with attractive real returns over the long-term. Now is not the time to lose courage, but to keep a cool head with your eye focussed on the long-term objective of your investment. We are here to try and help you navigate through these uncomfortable times and believe you will be rewarded in the long-term should you stay the course.
As I write this we are approaching Comrades 2018 and it reminds me of the contents of this letter – it is important to remember that investing, like the Comrades, is a marathon and not a sprint; it takes time, persistence, consistency, discipline and commitment to achieve your ultimate [investment] goal. The Comrades [and investing] would not be possible without the support and encouragement of the many spectators; we as your advisers are your spectators helping to get you through the toughest times and celebrate with you every step of the way.
It seems the dust has settled on the short-lived ‘Ramaphoria’ which saw the ZAR strengthen and resulted in a rally in SA Inc. shares. We continue to see the benefits of offshore diversification [the exchange rate is not the only factor to consider when investing offshore!!!] and strongly believe that you will be rewarded for your patience during this seemingly never ending downward cycle.
As always, please do feel free to contact us should you have any concerns or queries.
“Stacey Barron”
Finlaw Consulting 31 May 2018
“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
Warren Buffet
