‘Lost decade’ – what now?

There is light at the end of the tunnel for SA investors

By Andró Griessel

3/8/2024

Any investor who has seen the latest report on unit trust returns and thinks that they might as well have hidden their money in their living room couch over the past 10 years can be forgiven for this thought. The past decade indeed feels like a “lost” decade for investors who mainly had South African exposure in their portfolios. From the accompanying table, it is clear that, regardless of what you owned, your return would have been more or less the same if you had achieved the “average” return of each specific investment category.

What might be somewhat surprising for many readers is that the performance of the same investment categories in the international space was not much better (with the exception of stocks).

The topic of SA vs. international has been discussed extensively. However, I believe there are a few points from the past decade that one should consider when making decisions for the next decade. Some of these might significantly impact your returns.

    • The average return per category is exactly what it says, an average. This suggests that there are fund managers who performed significantly better and others who performed significantly worse. The greater the allocation to stocks, the larger the performance difference between the fund that performed the best and the one that performed the worst. The gap between, for example, the best and worst-performing SA equity funds is a staggering 10.42% per year. My experience is that most investors do not know whether the funds they invest in perform better, worse, or in line with the average fund in the same category. Being in an underperforming fund for 10 years can be even more detrimental than being in the wrong asset class.

 

    • A quick tally shows that the 10 funds which were in the last position in their respective fund categories over the past 10 years (see the accompanying table) represent a total of R4.59 billion. This suggests that many investors are not keeping a close eye on their investment balances.

 

    • Valuations matter: At the end of June 2014, the South African market was very expensive after an incredible 10-year bull run – the average (note) performance of funds in the SA equity category over the period from June 2004 to June 2014 was 19.2% per year. Although I did not expect such a long and exhausting decade to follow, poor returns, at least over the short to medium term, were to be anticipated for SA equities. The current valuation starting point for SA equities is the reverse of 10 years ago, with the resulting expectation that outcomes will differ significantly.

 

    • If you have been feeling depressed for a few years because you think you missed the boat on international investments, it might help to know that only those who could afford to invest a significant portion of their wealth in high-risk, purely international equity funds have ridden the long wave all the way to the shore. The reality is that such an allocation simply wasn’t suitable for 80% or more of investors. At best, they would have needed to look at a “balanced” international portfolio that included other assets like bonds – and international bonds had a poor decade with returns of about 4% per year in rand. While exceptional stories are often shared as the norm, the reality for most investors (even those with an overweight international position) was much less thrilling.

 

    • There has emerged a somewhat binary thinking pattern where we talk about SA vs. international as if they are only two asset classes, and by international, we essentially mean the US. Most South Africans’ portfolios, when looking at geographic allocation, have more than 75% exposure to only these two countries. It would be wise to consider a broader perspective for your portfolio construction in the coming decade.

 

    • A low (or no) allocation of capital within South Africa over the past decade did not have significant wealth implications for people since you would not have fared much worse with your conservative funds in the money market compared to those who braved the local equity and bond markets with gritted teeth. We do not think a repetition of this over the next decade is realistic.

 

    • If you were fortunate or wise enough to allocate significantly to the US market 10 to 15 years ago and maintain it, you would have experienced a wonderful period of wealth creation. My advice is that you do not need to lose your money in the same way you made it.

 

According to most fundamental indicators, the US market appears expensive. The first signs of trouble emerged in 2022, but the market shook it off and continued to surge in 2023 and 2024 (though concentrated in a handful of stocks). From experience, we know that trees do not grow to the sky, and there is likely a disillusionment awaiting those who believe this time is different.

Is there light at the end of the tunnel for South African investors? We certainly think so – and surprisingly, it’s not an oncoming train but an investment cycle where we may have already reached the turning point of maximum pessimism. This is usually where excellent opportunities are found. However, remember that the decision on asset allocation is not just between international (US) equities and SA equities and that South Africa constitutes a very small component of the world’s capital markets.

Your investment plan will therefore need to be a bit more sophisticated than simply swapping one for the other.

Andró Griessel is a certified financial planner and managing director at Woodland Wealth. Contact him at info@woodlandwealth.co.za.

Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorized financial service provider with FSP no. 5966.

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