You can’t fix a slump – stay with it – because feeling a tad disillusioned by your investment portfolio is a sign of the times, says Eugene Visagie of Morningstar Investment Management SA (MIMSA).
For the best part of five years, investors could be excused for thinking they’ve been hitting the replay button on a bad repeat of bleak market conditions, the portfolio specialist said. And in the time that global markets have rallied, South African investors have missed out.
“Stay the course, ride the storm and don’t feel tempted to make changes for the sake of trying to fix things,” Visagie said. After prolonged periods of low returns, we often find ourselves being tempted to ‘do something’, to make a change and to fix what’s not working. “However, this can be precisely how wealth is destroyed over time,” he said.
Nobody wants to get rich slowly
Equities deliver real returns to patient investors. “While nobody wants to get rich slowly, the irony is that it pays to stay the course,” said Visagie.
If an investor had been exposed to the South African equity market from 1 January 1995 to 30 April 2019, they would have generated an annual return of 14.2%, he pointed out.
This period includes tough market conditions, including the emerging market crisis in 1998, the tech bubble of the early 2000s and the global financial crisis in 2008/09 – and the last five years during which the local equity market has been relatively flat. After inflation is accounted for, this is an annualised real return of just over 8% per annum in 23 years.
“The numbers are clear; don’t worry about the noise, think long-term,” Visagie said.
In spite of the evidence, the temptation exists to attempt to time the market – that is, pick an entry and/or exit points. “We believe that trying to time the market is a fruitless exercise,” said Visagie. “Often, the best time to invest is when things feel most uncomfortable.”
If you had tried to time the market over the past 23 years and missed just the best 100 days of the total 5,934 trading days, your return would have been -2.2% per annum, instead of 14.2% per annum for the full period, Morningstar said.
“It’s clear, staying the course works,” Visagie said. Yet, despite the compelling evidence, there has been a material move by investors out of equities and into more conservative money market and fixed income products. These asset classes provide a comfortable return profile with more predictable returns, and they have rewarded investors with positive returns over the past few years, the portfolio lead said.
Has this been an appropriate course of action?
Time will tell, Visagie said, but Morningstar hasn’t ruled out a comeback for the unit trust industry, “especially given that the largest casualty has been the multi asset/balanced funds which used to take the lion’s share of industry flows”.
“Despite disappointing performance from local risk assets and balanced funds in the recent past, we believe that investors with a medium- to long-term horizon need exposure to these assets to generate inflation-beating returns,” said Visagie. He said that investors run the risk of not achieving their financial goals if they move between different asset classes based on short-term performance.
The bigger picture
As we enter the mid-year mark in 2019,Visagie said interesting opportunities may present themselves when looking purely at valuations.
“The economy is not the market. What matters most is to not overpay for a stream of long-term cash flows,” he said. According to Morningstar, many domestically-focused businesses remain out of favour due to the persistent gloomy economic outlook in South Africa.
“With the possibility of policy reform geared towards the goal of economic growth, investment managers are aware (albeit with caution) of any unlock that could potentially materialise from purchasing these assets below fair value,” it said.
“Our asset allocation framework provides a tried and tested method for building portfolios that is not reliant on one market outcome. Our view is that a diversified portfolio tilted towards asset classes with higher future expected returns, within appropriate risk constraints, provides the best chance of delivering outcomes in line with our investors’ objectives.”