“A Ship is Safe in Harbour, but that is Not What a Ship is Built For.” – William G.T. Shedd – Theologian, Teacher, Pastor
For South African investors, the last couple of years have been tough and frustrating. When you look back at all your efforts, meetings, research and best intentions, and actually have to pat yourself on the back for running frantically and standing still, even though a lot of the field has gone backwards… it still hurts! As at the close of market on Friday 23 June 2017, over the last 12 months the SA Equity Market (ALSI) has lost 1.1%, led by Financials which are down 3%, Resources down 1.1% and industrials down 0.3%. SA Listed Property has managed to generate 4.4%, and the only real winner has been SA Bonds which have returned a solid 10.1%! Most of this damage has been made by our Rand which continues to rally and has strengthened 9.8% against the USD over the same period.
This hasn’t been the same case globally. After a long period of underperformance relative to Emerging Markets, such as ourselves, the wheel has finally turned for Developed Markets. Who would have thought that through the Brexit saga, Eurozone woes and Trump madness, markets would have rallied?! Over the last 12 months the US market (S&P 500) is up $15.4%, the UK market (FTSE 100) is up $17.1%, Japan (Nikkei 225) $24.1% leaving the MSCI World Index up $13.8!
Imagine if you had been sitting on the side-lines, scared by the negative headlines and hence missed out on the unexpected returns?! A lot of work has been done on the effect of missing out on the 10 best trading days on various market indices over different time periods. I used the most up to date study I could find, completed by Gravitas Securities Inc. It looked at the performance of the Dow Jones Industrial Average Index over the last 15 years ending 31/12/2016. There are 252 trading days per year, which equates to 3780 trading days for the period. The average annual return for investors throughout the period was $7.28%. By just missing the 10 best trading days (0.2%) you would have lost $4.68% p.a. which reduced your overall return to just $2.60% p.a.! If we extrapolate this further to missing out on the best 20 trading days, your return drops even further to -$0.25% p.a.
Even Warren Buffet stated in his recent Shareholder address, “I have never met anyone who can consistently beat the market, nor have I met anyone that has met anyone that could either.”
The message is simple and timeless, STAY INVESTED!
Waiting for the market to fall in order to buy back in has been a terrible strategy, far worse than buying and holding. By staying invested, and not sitting on the side-lines in cash, you may hurt over the short to medium term, but when the market does turn you are already in, having accumulated units at a lower price, ready to reap the rewards of your patience and persistence. It is imperative to identify where you are in the cycle, cash is only risk free at the top of the cycle, at the bottom it becomes risky due to the opportunity cost of deploying/investing capital.
I can recall countless presentations I’ve attended and numerous research papers I’ve read over the past few years, with the same sombre message for South African investors:
‘Expect lower returns for longer’
And, my goodness have they been low for long! Isn’t it always the curse of human behaviour to extrapolate recent behaviour into the future. We have been told time and time again to separate emotions from rational investment decisions, but that is far easier than what it sounds.
The good news is that we at Harbour believe times are changing, and we are not alone. At a recent investment conference, I attended, this sentiment was shared across quite a few of the large and boutique investment houses. In fact, this can best be viewed by Coronations published asset class forecasts, comparing the previous 10-year annual average returns vs the forecasted returns for the next 10 years:
- Local equity 6% p.a. vs the next 10-year forecast at 8-12% p.a.
- Global equity has returned 9.5% vs 8-12% expected.
- Local property 2% vs 9-12%
- Local bond 1% vs 8/9%%
- Local cash 4% vs 7-8%
- Inflation 4% vs 6-7%
The story has finally changed, baring SA Listed Property, better returns are expected but no one can pin point exactly when this will happen. Perpetua Asset Management are quite comfortable to forecast a 21% average annual return for their SA Equity Fund which is 100% invested in SA over the next 5 years!
It takes courage to buy when times are bad, we know that!
We at Harbour can and will assist in guiding you through any choppy waters, but staying true to our investment philosophy and process, we will always make sure that your ship is holding its course. After all, smooth seas never result in a skilled sailor!