Figures supplied by the Association for Savings and Investments SA (Asisa) showed surprisingly that despite one of the worst market performances since the 1930’s, over the last five years equity-based unit trusts outperformed other low-risk unit trust funds such as asset allocation funds.
The average performance from unit trusts that invested in large South African companies delivered an annualised return of 20% over the last five years.
The average general equity, growth and value funds all delivered annualised returns in excess of 15% per year. Of course when we talk about annualised we mean the total return over the period divided by five years, with some good, and some bad years.
The reality is that most of these returns were made between 2005 and 2008 (see graph) and it was certainly not a consistent annual return, but the point is well made that if you are investing for more than five years, equities still have a very important role in your portfolio. By contrast, low risk funds such as asset allocation prudential funds, which invest across a range of asset classes including cash and bonds, delivered between 10% and 12%. What is also interesting to note is that flexible asset allocation funds — which are able to invest fully in equities or cash and bonds depending on market conditions — underperformed the pure equity funds, with the average return for the sector at 13% a year.
While the returns may have been less volatile, one does need to question whether the average fund manager is able to add value over the longer term through tactical asset allocation (market timing).
What these figures do not show however, is the effect of an investor investing all their cash at the peak of the market. An investor, who had bought into the JSE all-share index in May 2008, would still be down about 13%. So the timing of when you invest a lump sum will have an effect on your returns and if markets are looking on the expensive side, it is always best to phase your investment in over a period of time.
FTSE/JSE All Share Index Dec 2004 — Dec 2009