The past few months have been difficult for many South African investors, as most asset classes are in negative territory this year. The below performance chart is one of our favourites here at Harbour Wealth for a number of reasons, which we will discuss. Let’s first highlight a few key points by looking at the different asset class returns (in South African Rands) over the last 10 years:
Source: Morningstar Direct
- The growth asset classes (Local and Global Equity and Listed Property) have experienced a rocky start to the year – the JSE All Share Index is down 5%, MSCI World Equity is down 7.7%, Global Property is down 10.2%, and the worst performing asset class so far in 2018 is SA Listed Property which is down 19.3% (as at 27 March 2018).
- SA Bonds have only generated clients a 6.8% cumulative return from 2013 to 2015, yet bonds ranked first in 2016, and again is the best performing asset class so far this year, due to heightened levels of uncertainty.
- The rally in SA Equities between June and December last year was sudden and unexpected and was missed by many investors sitting in the side-lines in cash. Despite the low returns in 2015, 2016 and year to date (YTD), the JSE All Share Index has delivered a 5 year annualised return of 10.3% (as at 27 March 2018) and ranks as the second best asset class after Global Equity. This return is 5 to 6% above inflation, which is in line with the targeted return of many growth funds and ahead of returns achieved by investing in Bonds and Cash.
- SA Property has proven to be the best performing asset class over the last 10 years. Barring its weak performance this year (mainly due to Resilient Group alone). 2013 was the only year in which it ranked in the bottom half of all asset classes.
- Global Equity returns are scattered throughout the chart showing the effect of our volatile currency on asset swap positions (investing into global funds in Rands). Despite this, Global Equity is still the best performing asset class over the last 5 years, generating a Rand return of 14.7% per annum.
- Global Property has been one of the top performing asset classes between 2011 and 2015. Since then, Global Property has underperformed, but again its 5 year return of 10% per annum is solid, outperforming Cash, Bonds and SA Property.
- Although many investors feel uncomfortable about the market returns over the recent short term, it is important to remember that any investor who was sitting with their money in the bank over the past 5 years would have missed out entirely on the strong positive and compounding returns from the growth asset classes.
- The risk/return trade off of growth assets is vital for long term capital growth. The longer you remain invested, the lower the volatility becomes. In fact, over any 4 year rolling period, an investor would never have lost capital if they had invested in the SA Equity Market (JSE All Share Index).
Key Investment Messages:
- There are no sure bets in the world of investing and markets are random. Predictions about the top (or bottom) performing asset classes in any given year are difficult and not even the greatest Fund Managers get this right all the time. If we look at the same performance chart ranking different Fund returns – we see the same pattern. Often the worst performer in one year becomes the best in the next year and vice versa. Cash and Bonds make for a poor long-term investment option but can be top performers over the short term when volatility spikes. During times when the markets are unpredictable (such as this), the urge to do something could be dangerous – and we all know that trying to time the market can result in you achieving the opposite of what you set out to do. In other words, buying high and selling low, locking in that loss, and hurting your long-term investment performance.
- Focus on the long-term. The market constantly reminds us that short term performance is often scary. It takes a lot of discipline and patience to be a long-term investor and think beyond the short-term numbers. According to one of the greatest investors of all time, Warren Buffet, “Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time.”
- No winning streak lasts forever. This talks to the concept of mean reversion whereby no asset class will outperform consistently and forever. We could spend hours analysing past performance, but it will tell us nothing about future performance – which in itself is a critical reason why an investor should not choose a Fund based on performance only.
- The importance of diversification. Diversification is the simplest way to reduce risk. Put differently, you’ll never be the top performer by diversifying but you’ll never be at the bottom either. At Harbour Advisory, we focus on creating the optimal asset allocation mix for our clients.
In closing, the world of investing requires discipline, and investing successfully requires a thorough understanding and appreciation of all the above-mentioned factors. We urge our clients to be weary of placing too much emphasis on the effects of short term market volatility. Your investment solutions are carefully designed and consistently managed in order to reach your long term goals and objectives. Stick with your long-term investment objectives, and don’t allow yourself to get side-tracked by short term fear.