As mid-year approaches the investment industry is bracing itself for a new outbreak of ‘quarteritis’, cautions marketer of the unit trust products, Stanlib.
‘Quarteritis”, it says, is a dangerous phenomenon and can cost retail investors tens of thousands of rands every time they fall victim to the contagion.
‘Quarteritis’ is the name coined within the financial services sector for the spate of investment switching that often accompanies the publication of the latest quarterly rankings of unit trust performance.
Says Busisa Jiya, Stanlib’s head of Multi-Manager Funds: “The danger is particularly acute when markets are down as they are at present. ‘Quarteritis’ is dangerous because it destroys wealth and plays havoc with long-term investment planning.
“Typically, a retail investor loses patience at precisely the wrong time. He or she sees that another fund has performed better than his or her fund and switches the investment to the new quarter’s big winner.
“This incurs a cost and locks the investor into a policy of trailing the market curve. You want to be ahead of the curve, not behind it.
“Experience shows that asset managers move up and down the rankings. Being top today is no guarantee you’ll be top tomorrow. In fact, you could have realised your upside potential and be approaching a period of decline … in which case the investor has sold low in order to buy high just in time to participate in another market slide.”
This behaviour tends to increase the risk that an investor will become a victim of volatility rather than a beneficiary.
Jiya’s advice to consumers is to develop a balanced and diversified portfolio, setting long-term goals. After that, a good tip is to keep an eye on “the smart money” and ask why institutional behaviour is so different from retail investment behaviour.
For instance, institutional funds have shown a net inflow into multi-manager funds at a time when many retail investors are moving out of equities. The latest figures from Stanlib show that approximately R270-million new institutional inflows for the
month of April have been seen.
Jiya says there are two principal reasons for this behaviour.
Institutional investors have “longer pockets” and can take a longer view.
The mindsets are different. The retail investor looks for an absolute return
every quarter (often a big ask). The institution is looking for “a superior risk adjusted return”.
This means he seeks a modest plus against a key benchmark even though a 2-5% gain might still leave the investment in negative territory over a specific quarter.
Jiya explains: “Institutions combat volatility by looking for a solid performance that avoids the deepest troughs, even though the investment might also fall short of the topmost peaks.
“Over time this risk-adjusted strategy achieves solid gains.
“In contrast, the retail investor often chases last quarter’s top performer or switches asset allocations into an asset class that has topped out and can be expected to retreat some time soon.”
So, how does one avoid ‘quarteritis’?
Says Jiya: “Often by doing nothing at all. If you had a sensible, diversified strategy three months ago there is a good chance the strategy is still valid today. If you cut and run you turn a paper loss into a real loss. You also get into the habit of buying high and selling low. No one ever got rich that way.” – I-Net Bridge