Daily Equity Report

Managing expectations is an important part of investment management.

The above statement is a simple one, and one can be forgiven for assuming that it is an easy concept to follow. It is human nature to continuously push the boundaries of possibility, and this can be manifested in the investment world through the pursuit of improving returns while lowering the level of risk.

In this regard most investors, no matter how experienced, will desire to improve their returns, and it is this desire that will sometimes lead to the confusion of what is desired, and what should be expected. Where the difference between the desired return and the realistically expected return is large, and where the desire far outweighs the rational expectations, we find ourselves set up for disappointment.

One is able to extrapolate from history that over the long term one can expect different return profiles from different asset allocations. These return profiles also come with their own risk profiles that one needs to be cognisant of. Key here is that these expectations are based on long term data. With markets going through both good and bad periods there will be shorter periods (perhaps extending to the medium term) where returns will be both above and below what is expected.

In periods when above average returns are achieved, one must be careful not to extrapolate these special returns into the future. This will result in your expectations not matching the reality.

On managing expectations between relative and absolute returns it is important to separate the component returns.

On a portfolio level one should be looking at absolute returns, i.e. returns that are benchmarked to inflation / cash. This type of benchmark is desirable as ultimately your long term investment goals should be geared towards a real return benchmark.

Each of the component asset class returns should be compared to relative indicators, i.e. returns that are benchmarked to indices / peers. An equity manager, for instance, can’t be expected to give positive returns when the market is down 30%.

The asset manager should then be responsible with making the asset allocation call between the various asset classes, overweighting cheap assets, and underweighting expensive assets.

A manager who is able to generally select investments that beat their peers, and asset classes that are cheap will be able to, over time, achieve the desired long term absolute and relative return targets. Key again is the long term time period, as any investment thesis needs time to reach its maturity.

Enjoy the rest of your short week.

Take care,

Mike Browne
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966