Disappointing markets call for a cool head

Louis Niemand, investment director at Investec Asset Management. (Image supplied.)
Louis Niemand, investment director at Investec Asset Management. (Image supplied.)

Most investors have been disappointed with returns over the past three years.

For example, multi-asset portfolios have struggled, with the average SA Multi-Asset High Equity unit trust posting 3.4% per annum* over the three years ended March 2018. 

While disappointing, this is unsurprising given that the available asset classes have delivered low returns individually.

As can be seen in the table on the right, four of the seven primary asset classes came in with negative real returns (absolute return less inflation).  

The traditional engines of portfolio growth, equities (both local and offshore) fell below 10% per annum (p.a.) over the period.

Domestic bonds surprised on the upside on the back of a last-minute reprieve from downgrade to junk status by global rating agencies. 

Although global equities delivered above-inflation returns in dollars, rand strength sapped the returns of local investors.   

With these disappointing returns from markets, despondent investors may be wondering why they should stay invested. 

History shows that a negative real return from equity markets over the short to medium term is not that uncommon, but over the long term equities remain the primary driver of investors’ wealth. 

Over the last 27 years (since the start of 1990), the local equity market delivered a return of 13.9% p.a., well above inflation of 7.4% p.a. 

We acknowledge that factors such as income requirements mean most investors do not have a 27-year investment horizon.

Examining rolling three-year periods is more useful for such investors.

The graph on the right puts the last three years’ real return of -0.7% p.a. (5.1% return p.a. minus 5.8% inflation per year) in perspective when compared to returns since the start of 1990.

The average real return of all three-year periods was 8.4% p.a. However, a closer look reveals that there were a number of periods where investors experienced negative real returns over the medium term.

The table below highlights some of the historical performance trends. 

Investors have needed to tolerate negative real return periods, in order 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%.

Abandoning the market at the point of discomfort is a traditional mistake. Investors should seek advice before taking action on the basis of regret or fear.  

There will always be periods of disappointment where investment returns fall short of inflation over the medium term.

When looking at domestic equities, it happened approximately 27% of the time over all three-year periods since 1990. 

Equity markets are by their nature volatile – but equally, have rewarded persistent and patient investors with attractive real returns over the long term.

Now is not the time to lose courage, but to stick to long-term plans drawn up with cool heads – plans intended to help investors weather these uncomfortable times. 

Louis Niemand is investment director at Investec Asset Management.

This article originally appeared in the June 2018 edition of FundFocus. Buy and download the magazine here or subscribe to our newsletter here.

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