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    Seed Weekly - Investment Returns from Local Shares

    Half way through the calendar 2017 is a good time to take stock of what investments have produced – not only for the 6 months – but for longer periods of time as well.

    It would be fair to say that investors into the local equity market have been disappointed now for at least two to three years, where both the rolling annual returns, and the compounded 3 year return, is far lower than what investors have become accustomed to. Below are a few of the numbers for clarification purposes:

    • The JSE All Share index up 3.4% for the 6 months to June 2017
    • Over the last 3 years, this index has compounded at the same level at 3.4% per annum
    • The Top 40 index fared slightly worse at just 2.5% per annum
    • The Resource index has had a torrid time, declining by 15.4% per annum over 3 years
    • Industrials, the best performing main sector, has also only returned 7.6% over the 3 years (annualised)

    Naturally, these returns are far less than what investors have come to expect, and also relative to expectations, given the risk levels. As mentioned above, the total return from an investment into the JSE All Share index has now compounded by only 3.4% per annum over the last 3 years – very poor when compared against a relatively lower risk investment of money in the bank.

    One concern we have regarding the sideways price movement over the last 3 years, is that it has not been accompanied by an improvement in valuations. Typically, there is an improvement in valuations as prices fall or move sideways. However, when we measure current valuations compared to long term valuations, they remain on the expensive side.

    On a positive note, one of the factors that has put pressure on the JSE All Share index over the last 18 months has been the firmer rand, which, from closing at R15.86/USD at its weak point in January 2016 has strengthened to its current level around R13/USD. As 50% - 60% of the JSE All Share is rand hedged, this headwind has the potential to turn into a tailwind, should we see rand weakness from this level out.

    Chart 1 (below) reflects the annual total return from an investment into the JSE as measured by the JSE All Share index. Since 1986, the 12 month return has varied from a positive 80% to a negative 37% as measured on month end prices. Clearly, there is huge volatility in the 12 month total return that an investor experiences on the local stock market.

    Chart 2 (below) compounds up these returns from January 2003. Even with the large 2008 sell off in the global financial crisis, prices have moved up on average by approximately 15% per annum from the base in 2003. When taking into account dividends, the total annual return for this period came in at 18.4% per annum. Extending that for the poor performance over the last 3 years has now reduced that compounded return to 15.9%.

    Chart 1 : FTSE/JSE All Share total annual return

    Sources : Inet, Seed Investments (30 June 2017)

    Chart 2 : FTSE/JSE All Share Index Price Return

    Sources : Inet, Seed Investments (30 June 2017)

    In conclusion, given the range of issues that has concerned the rating agencies resulting in downgrades, it would be fair to say that the risks of investing in South Africa have generally increased. Therefore, investors should demand a higher required rate of return. Over the long period of history, investors have been rewarded with higher returns, but as illustrated in the charts above, this return is never achieved linearly.

    Kind regards,

    Ian de Lange

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

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2017-07-20, 13:03:17, by Mike Email , Leave a comment

    Seed Weekly - Investor Returns and the Cost of Timing the Market

    The current investment environment provides a test of patience for investors, particularly when one is not prepared for periods of underperformance. It is normal for funds to underperform as performance goes through cycles. Knee-jerk reactions fuelled by emotions of fear and greed often result in investors not achieving the full investment cycle returns from the funds they invest in.

    Fund total returns widely published by independent data providers on fund manager websites and marketing materials reflect a buy-and-hold strategy over the investment period. However, some investors, because of fear and greed, do not follow this strategy, but rather attempt to time the market, selling underperforming funds and buying those that are outperforming. This behaviour can be harmful, particularly if investing in a fund that has already reached the peak of its performance cycle. Chart 1 (below) illustrates such investor behaviour, and Chart 2 illustrates the cost of trying to time the market.

    Chart 1: Investor Behaviour Fund Flows Follow Short-Term Performance
    1 Year Rolling Return Quartile Rank and Monthly Fund Flows
    Chasing Performance = Greater Inflows When Top Quartile Performer

    Fund A is a South African Multi-Asset High Equity Fund. Inflows and outflows are closely linked to the short-term performance illustrated by the 1 year rolling return quartile rank.
    Source: Morningstar Direct (10 July 2017)

    Chart 2: Investor Behaviour – The Cost of Chasing Performance
    Switching from High Equity to Low Equity During Period of Underperformance

    Leading up to February 2009, the Multi-Asset High Equity Category fell -15% compared to the Low Equities -1%. A switch at the time to the Low Equity to minimise losses would have seen a subsequent 3 year cumulative return 16% lower in the Low Equity Category.
    Source: Morningstar Direct (10 July 2017)

    Since cash flows result in a different experience for the investor compared to the actual fund total return, a dollar-weighted return (investor return) gives a better indication of how the average investor performs over time. When the investor return is lower than the fund total return, it implies that more investors participated in downside returns and less in upside returns. This is common when investors chase returns and pile flows into funds at the peak of their performance and can also be exacerbated by not selling a losing fund. Investor returns are greater than total returns when there is more upside participation by investors.

    A global report published by Morningstar showed a 5 Year return gap between investor and total returns up to the end of December 2016 ranging from -1.43% to +0.53% (negative indicates lower investor returns). Results from the US and Europe where data sets are more reliable show the challenges that investors face because of the unfortunate timing of cash flows, generally resulting in lower investor returns. The more volatile Funds and higher cost funds tend to have the larger return gaps. A sample of local funds in the Multi-Asset categories over a 5 Year period gives a mixed bag of results as shown below. Wide negative return gaps on some funds illustrate how investors lose out in comparison to overall fund returns.

    Chart 3: Selected Large South African Multi-Asset Fund Investor Returns Compared to Total Returns
    Difference Between Investor and Fund Total Returns (%)
    5 Year Local Multi Asset Fund Returns

    Source: Morningstar Direct (10 July 2017)

    It is key for investors to select appropriate funds aligned with their investment objectives from the onset and then stick with these Funds through cycles. At Seed, we are guided by a well-defined investment philosophy and rigorous process which means our fund and manager selection is in line with our long-term strategy. This ensures that our portfolios behave as expected, including periods of short-term underperformance. Sticking with such a strategy over the long term is key to attaining investment objectives.

    Kind regards,

    Tawanda Mushore

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

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2017-07-12, 12:16:15, by Mike Email , Leave a comment