Graham Tucker, portfolio manager of the Old Mutual Balanced Fund in Old Mutual Investment Group’s MacroSolutions boutique, pointed me recently to the latest edition of Long Term Perspectives, a study compiled annually by him and several of his high-powered market analysts.
A superb product, it scrutinises the performance and behaviour of select asset classes over the past 87 years or more.
In no particular order, these are some of the analysts’ main insights:
Inflation is your enemy: If you hold R10 000 cash today at a 6% inflation rate, the sum will be worth only R5?584 in 10 years, and R3 118 in 20 years.
Time needed to double your money: Using each asset class’s long-term average return, it will take you 10 years to double your equities’ real investment value; 41 years to double your SA bonds’ real value; and 90 years to double the real value of your cash holdings.
Equities are needed to grow long-term wealth: The main reason many investors prefer cash to equities is the fear of losing money. The reality, however, is that during the past 87 years nominal returns of equities grew an average 14% a year, South African bonds 7.8% and local cash 6.9%.
Time is your friend: The best way to manage the risk of losing money is to remain invested in equities for longer. History shows that if your holding period was extended to five years, you wouldn’t have lost money in equities.
Compounding is a powerful wealth generator: Using the long-term average nominal return of 14% a year for SA equities, R1 000 today will be worth R3 712 in 10 years and R13 780 in 20.
Don’t put all your eggs in one basket (the case for balanced funds): Equities may have been the best-performing asset class since 1929, but cash was the best performer for 11 of those years and listed property for nine. Explained differently, all asset classes have distinct secular or long-term periods of under- and out-performance.
Following on the previous point, beware of severe drawdowns: Investors who bought equities at the peak in 1948 lost more than half their money (-55.2%) in real terms in just over five years. It then took 15 years to get back to breakeven in real terms.
Enemy number one, SA inflation: This has averaged 5.6% over the past 105 years and 6.3% over the past decade which compares unfavourably with 4.3% in the UK and 3.5% in the US.
Last year SA’s inflation rate was considerably higher than that of Brics members China at 2% and India 4.8%, but better than Russia 7.1% and Brazil’s 8.8%. MacroSolutions expects it to average 5.5% over the next five years.
At the average vehicle inflation rate since 1990 of 5.8%, a new car costing R260 000 now, will cost R455 000 in 10 years and R1.05m in 20 years. Likewise, at 9.2% educational inflation, one year’s tuition at a top Cape Town private school that costs R200 000 now will cost R482 000 in 10 years and R1.8m in 20 years.
If your retirement income does not at least grow in line with current inflation, you will either experience a decline in your standard of living or you will run out of money. At a 6% inflation rate, a fixed retirement income of R10 000 a month will decline in real terms to about R1 700 a month in buying power after 30 years.
SA Equity: Last year was another difficult year for the domestic equity market as a whole, but it’s now in line with the long-term trend of 7.9% annualised capital appreciation. This suggests that the balance of risks is shifting to the downside.
The market, however, is considered to be expensive at present, which means that returns will probably be lower, going forward, than the real return of 6.9% a year we’ve seen over the past five years.
SA Listed Property: This is effectively a hybrid of equities and bonds, offering both capital growth as well as a stable and growing rental income component. Since 2002, dividends and reinvested dividends have accounted for 67% of the total return. The remaining 33% was capital return.
Nominal returns have been 14% a year since 1980; the highest annual return 53%, and the lowest -26%. An amount of R100 invested in listed property 20 years ago would be worth R2 955 today. Over the next five years expect property to deliver a nominal 11% annual return or 5.5% real return.
The rand: With global conditions having improved through 2016, the rand responded positively, as has been the case historically. Looking forward, global economic conditions are expected to be broadly rand supportive, but local economic and political developments hold downside risk to the currency.
This article originally appeared in the 8 June edition of finweek. Buy and download the magazine here.