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    Seed Weekly - Investment Choices

    The answer is, “It depends, but probably a Balanced Fund…”

    Over the past few years, South African investors have generally been disappointed with their investment returns – and rightly so. Asset class performance has been lacklustre across the board and investors would have needed to do something ‘special’ (read – risky) in order to generate satisfactory returns. As such, many investors now want to put their investment savings into cash or cash like investments. The line of thinking is that cash is low risk (i.e. low chance of losing capital) and will provide returns in line or close to what balanced funds have delivered over the last couple of years.

    While cash/very low risk investments do have their place in a portfolio, especially where an investor has a short term savings goal, it is important to ensure that the overall portfolio allocation matches the investor’s investment requirements. For most investors, the bulk of their investments will typically be used to service their income needs in retirement, these investors will therefore have an investment horizon of 5 years plus on the bulk of their assets (even most investors IN retirement will require their savings to last longer than 5 years).

    It is therefore interesting to stress test how a ‘5 year horizon strategy’ would have performed over the 2008/9 financial crisis/market crash, which is widely acknowledged as one of the most severe of all time, versus cash. For the purpose of this exercise I have taken the performance of the four largest (most popular) balanced funds in South Africa (funds that sit in the ASISA South Africa Multi Asset category) over the full range of 5 year periods that incorporated the market crash (i.e. 31 May 2008 – 28 February 2009) and compared their performance to what an investor would have received from cash (in both cases before any tax effects – which generally has a greater impact on cash). For completeness sake, this incorporates rolling 5 year periods from 28 February 2004 – 28 February 2009 to 31 May 2008 – 31 May 2013.

    When looking at all of the rolling 5 year periods it is evident that these managers have done really well versus cash (STEFI Call). Two managers managed to outperform cash in all rolling periods and the other two outperformed cash 98% of the time (even the average manager outperformed nearly 70% of the time). The chart below illustrates this fact. It is also interesting to note that even with the market crash as part of the observation period these funds in some cases were able to deliver returns in excess of 15% pa and in most cases in excess of 10% pa.

    Source: Morningstar 18 April 2017

    While it is all good and well to look at the performance after the full period and recognise that it would be a good idea to remain invested through the market stress, it is a much different story in the heat of the moment, i.e. during the market turmoil. I have therefore taken each of the above rolling 5 year returns and shown their return path. This chart (below) gives some sense of the range (208 possibilities) of investor experiences along the way to getting a 5 year annual return of slightly less than cash to a return in excess of 20% pa by investing in a balanced fund.

    Source: Morningstar 18 April 2017

    To simplify, I have then taken the best, worst, and the middle (median) return from the above and compared these to the same range for cash. As can be seen below, in the worst case scenario an investor into a balanced fund could have experienced a drawdown of 20% over a period of nearly 1.5 years, still been negative after nearly 2.5 years, and only overtaken the worst cash experience right at the end of the 5 year period! More realistically, the average fund investor would have generated a return some 4% pa better than the average cash investor, despite investing through the 2008/9 crash! It is also evident that an investor with a shorter investment horizon (i.e. 1 year or 3 years) should probably be investing into a lower risk option – potentially even cash!

    Source: Morningstar 18 April 2017

    A bell doesn’t ring at the top of the market, and no one has a crystal ball. For MOST investors it therefore makes sense to match their investment strategy (should ideally be invested into a well-diversified multi asset Fund) with their investment horizon and REMAIN invested through the various market cycles. As has been shown, the opportunity cost of giving up strong returns by moving to cash is generally MUCH higher than the cost of being invested at the worst possible time.

    Take care,

    Mike Browne

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

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    Permalink2017-04-19, 13:04:57, by Mike Email , Leave a comment
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