77 challenging months for returns

Do you want to fire your financial adviser?

By Andró Griessel


For my sins, I have been involved with investments for the last two decades.

I can confirm, without a doubt, that the last 77 months (which mockingly sounds like a lucky number) have been the most challenging period to generate decent returns (5% above inflation) with a multi-asset- or a balanced investment strategy.

Most readers probably have balanced portfolios and if I consider the returns of the last 6.5 years, there must be many who have considered firing their advisers by now. Although I have sympathy and understand the sentiment, it would be useful to consider the data before calling the fire platoon.

Suppose an investor has done everything by the book concerning his portfolio construction (including rebalancing it regularly). The person knows about the efficient frontier. Therefore he/she has a portfolio that is constructed optimally to maximise returns within the limits of a predetermined acceptable level of risk (or volatility).

Suppose his/her risk profile determined that there should always be a 72.4% exposure to growth assets (shares and property).

If it is not a retirement investment, the investor would not have been limited by Regulation 28 of the Pension Funds Act.

Assume a 50% exposure to offshore assets.

Further assume that the investor used a building block approach and used a specialist in each asset class to manage that part of the portfolio, rather than allocating his whole portfolio to one balanced fund manager.

For the purpose of this exercise, I have chosen the largest fund in each category (and therefore more investors have exposure to), with the exception of local equity.

And finally, I assume that the investment was made on an investment platform and additional fees of 1% are therefore taken into account.

The portfolio and returns would have looked as follows:

*The largest fund has been chosen in each category, with Coronation Top20 being an exception. The biggest fund in this category is M&G SA Equity, but the fund has not been in existence for the full 77 months of the comparison and has therefore been replaced.

Although the above is only a rough analysis, I would be surprised if investors reading this, who are invested in a similar mandate, would have achieved an outcome considerably different than returns of about 7% per year for the last 6.5 years.

A quick look at the performance of the three largest balanced funds in South Africa, confirms this suspicion with returns of 6.28%, 6.27% and 6.71% per year BEFORE admin and advice fees.

The official inflation rate for the same period was about 4.91% per year. That means a typical balanced portfolio (50% invested locally, 50% offshore with more than 72% exposure to equities) would have outperformed inflation by only 2.37%.

It is only slightly better than what a short-term cash investment would have delivered and a lot less than what an investment in South African bonds would have achieved. No wonder the fire platoon is cleaning their weapons.

Do you need to invest more offshore?

If you feel that Regulation 28 is to blame for the disappointing returns in your local balanced portfolio, you would be wrong.

Your return (assuming the same risk profile) would have decreased with an increase in offshore exposure. An increase in offshore exposure of up to 60% would have decreased your returns to 6.59% and a decrease in offshore exposure to 33% would have increased your returns to 7.97%

If you had to choose between a local balanced fund and an offshore balanced fund, the outcome would have been about the same. If you compare the return of the largest local balanced fund with the returns of the largest offshore balance fund, the return would be 7.28% and 7.13% per annum respectively (before fees).

Local equities performed better than offshore equities if you consider the two funds in the analysis only. The MSCI World Index as well as the MSCI All Countries Index outperformed the JSE All Share Index with about 1.5 to 2% per year.

This fact suggests that local fund managers succeed in generating meaningful alpha on the JSE while they battle to do the same with offshore portfolios. (Alpha is the ability to beat the market).

At the beginning of 2016, shortly after the Nene-Van Rooyen- debacle, not many commentators believed South African bonds to be a sensible investment. Who would have guessed that it was one of the best investments that you could make in the last 6 years?

It is a timely reminder that “stories” about the current state of affairs are hardly an indicator of future investment returns. The price that you pay for an asset, however, matters.

So where to from here?

No one can say for certain where we are headed as we find ourselves in uncertain times with a unique set of circumstances.

What I do know is that valuations (the price you pay for assets) have always been a great indicator of future returns. There are current assets, or in certain cases an asset class as a whole that seems promising in terms of value for money.

Periods of low returns often last longer than you expect (as is the case with high returns). Looking back, the last time the largest balanced fund, referred to above, failed to outperform inflation by more than 2% over a 5-year period was between May 2007 and May 2012.

It delivered a meagre 7.31% p.a. while inflation was more than 5%. In the following 4 years, however, it returned 16.1% p.a. – more than 10% above inflation.

We say it often, but it cannot be stressed enough. Growth doesn’t occur in a straight line.  The patient (yet informed) investor will be rewarded in the long term.

Andró Griessel is a certified financial planner and managing director at Woodland Wealth (previously known as ProVérte Wealth & Risk Management). Contact him at info@woodlandwealth.co.za.

Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial adviser. Woodland Wealth is an authorised financial service provider with FSP no. 5966.

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