Investment advisers split over equities versus cash
The history of returns shows that financial advisers and investment managers who suggested an increase in your exposure to cash and bonds at the expense of local equities roughly five years ago will have done well for you, their investors.
Local cash investments have returned on average 6.9% a year, local bonds 7.7% a year and local equities 5.8% a year over the past five years.
Those who suggested increasing global investments over local ones also look like heroes, as global equities have returned on average 12% a year over the past five years.
For most South Africans, the bulk of their savings, however, are in retirement funds, and their offshore exposure is limited to 30% of the fund. Therefore, participation in good global equity returns is muted.
This is in line with prudential guidelines in regulation 28 of the Pension Funds Act that ensure that your retirement investments are diversified across the asset classes.
Despite their ability to tilt the fund towards better-performing asset classes, multi-asset funds suitable for your retirement savings have over the past five years delivered average annual returns below those of the better-performing classes: 5.7% a year for high-equity funds, to 6.5% a year from low-equity funds that typically have higher exposure to bonds and cash.
Many managers of multi-asset funds, despite the recent poor returns, are now switching your higher-exposure investment categories to cash and bonds, and even global equities to local equities, because the prospects for local equities are improving.
A high-profile local financial adviser, however, says he is astounded by managers’ arguments that local equity returns will revert to their higher longer-term averages, as this fails to take into account the long-term damage to the South African economy over the past 10 years by the Zuma regime and the length of time it will take for that to correct.
Magnus Heystek, an independent adviser at Brenthurst, says there is a very strong case to be made for staying in cash until the economy shows clear signs of improvement and that many investors can’t wait for the local equity market to recover.
The longer-term averages, which show that in the long run equities give you the best protection against inflation, were highlighted this week when Old Mutual released its latest Long-Term Perspectives research.
The research shows that, over the past 89 years, equities delivered the best returns 47% of the time, while cash delivered the best returns just 12% of the time.
Peter Brooke, head of Old Mutual’s MacroSolutions, says if you are saving over 30 or 40 years for retirement, you take an enormous risk being completely out of the share market, given that the odds of equities beating cash are four to one.
Paul Stewart, CEO of Bridge Fund Managers, says over the past five years South African equity and listed property investors had no benefit from a change in the price of these asset classes, but over 15 years, a period that includes the past five years, property and equity returns have dwarfed those generated by cash or bonds.
History shows that being fully invested in a portfolio of assets capable of beating inflation in the long run gives you the best protection against the ravages of inflation, he says.
You can’t time the market
Attempting to time the market by calling returns on asset classes with high conviction is a mug’s game that defies a mountain of research, says Brandon Zietsman, the CEO and head of investments at Portfoliometrix, which specialises in constructing portfolios for financial advisers.
Zietsman says return outlooks are never “obvious” and when experts start crystal-ball gazing, you are dealing with “inadequate knowledge, ego or overconfidence”.
If you move your investments into cash, you immediately need to make another critical decision: when do you get back to equities and how do you know when the market has really turned, he says.
Typically, investors only return to equities after markets have firmly recovered and you have a 20% hole in your returns that you will never get back, Zietsman says.
Good advisers will coach you to stick to your investment strategy, he says.
Stewart says you must not underestimate the power of compounding dividends. Research in the US and SA confirms that, over periods of more than 20 years, dividends paid and reinvested, plus the growth in dividends, make up more than 60% of the total return.
Despite poor share-price growth over the past five years, dividend growth has remained positive, and patient investors are collecting dividends and reinvesting them in cheaper shares.
Diversification is essential
Anet Ahern, CEO of PSG Asset Management, says the role of diversifying across asset classes, regions or sector of markets is to have parts of a portfolio behave differently over time. The aim is not to improve the level of expected returns, but rather to consistently provide a more acceptable outcome over time, she says.
It also means that, from time to time, you will have to live with parts of your portfolio – like JSE-listed equities of late – not performing as you’d like them to in the shorter term.
Zietsman says moving to cash when you “fear for SA” is the worst of all strategies. Offshore asset classes and South African equities, which derive more than two-thirds of their earnings offshore, are a better bet.
Tilting to cheaper classes
Though most multi-asset fund managers maintain a mix of asset classes, there are times when shares are more expensive and managers will hold more cash, and when they are cheap managers buy more equities, Brooke says.
While the market was expensive in 2015, he says, Old Mutual had one of the highest levels of cash and bonds in its balanced fund ever on record. But now share prices have fallen, making equities cheaper.
Brooke says local and offshore cash, equities and bonds should always be blended in your multi-asset fund, but there will be periods when you should have more cash and times when you should spend your cash to get better return opportunities.
31 MARCH 2019 – 05:00 LAURA DU PREEZ