Investors quickly forget about the losses they suffered in the previous stock market crash.
In 2008/9 world equity markets collapsed on what was essentially a US housing market crisis. Local investors suffered as the JSE All Share shed more than a quarter of its value through 2008. Some of these losses have been clawed back since. And despite all the uncertainty, the investment gods favoured the brave last year, when equities—the riskiest asset class—delivered a 19% return. Ordinary bonds (+15%), preference shares (+14%), inflation-linked bonds (+11%), listed property (+10%) and cash (+7%) ensured that local investors beat inflation wherever they may have been invested.
As we progress through the third quarter of 2011, the equity picture is far from rosy. Global stock markets have displayed increasing volatility in recent weeks and have been advancing and declining by ridiculous percentages each day. These conditions make it very difficult for asset managers to deliver consistent performances across their portfolios, and clearly illustrate why last year’s winner is not “money in the bank” for this year. The chances of equities delivering the best asset class return through 2011, for example, are looking fairly remote at this stage.
“Since the beginning of this year most equity markets have moved sideways or declined in value,” says Louis Niemand, an investment specialist at Investec Asset Management. As a result, there has been a structural shift in the asset management industry, from cyclical asset classes and sectors to more defensive positions. This is the type of strategy—designed to generate market-leading returns in spite of deteriorating global economic conditions - that proves the value of the asset manager and its investment team.
The “last year’s winner” conundrum applies equally when buying chart-topping unit trusts. “It is extremely unlikely this fund will repeat its result in year two, three and beyond,” says Pieter Koekemoer, head of personal investments at Coronation Asset Managers. Short-term performance is often influenced by factors other than manager skill—for example sovereign debt concerns in Europe and the fear of a major slowdown and possible double-dip recession in the US.
Fred Liebenberg, head of Absolute Investment and Fixed Interest Manager Research at SYm|mETRY, highlights the danger of performance bias when selecting unit trusts by quoting from a recent study. The asset manager selected a number of funds with similar return objectives and track records spanning the period January 2002 to December 2010. The study showed that had you invested at the start of every year in last year’s best performing fund, your total return would be slightly worse than investing in last year’s worst performer each time. The moral of the story: looking at short-term performance is a lame duck investment strategy.
SYm|mETRY’s best-performing unit trust fund is the SYm|mETRY Balanced Fund of Funds, which has delivered returns of 15.3% per annum over the past decade—about 9% per annum above inflation for the period. As for performance: the fund placed third over the 10-year period of all funds in the Prudential Variable Equity unit trust category.
“What makes this performance noteworthy is that the fund achieved these returns with the lowest volatility of all the funds in the category,” says Liebenberg. “For investors it means they got strong peer and inflation-beating returns in a fund that never risked a substantial amount of their capital.” The product combines different managers and investment strategies and demonstrates the return-enhancing potential of actively managing the risk you take on in an investment. Once again—the value of asset managers is clearly illustrated.
If you have limited investment knowledge then it makes sense to approach your financial advisor for assistance in structuring your unit trust portfolio. For those who wish to “go it alone”, the Internet offers a wealth of information on unit trust products. You can visit the website of your preferred fund manager, which should publish detailed fact sheets—including fund mandates, minimum investments, historic returns, costs and portfolio holdings etc—for each of its retail funds. For background market data and general investment advice, websites such as www.equinox.co.za and www.fundsdata.co.za are excellent starting points.