Who wants the highest investment returns? Probably not you

South African investors have shown they would rather avoid losing money than take the chances required to make the best returns. They have sheltered en masse in multi-asset class portfolios for the past three years. An investment in a lower-cost equity index tracker, meanwhile, would have won the investment race by a significant margin – regardless of the dips in performance. 

Stefan illustrates that equities tend to outperform other asset classes by a healthy margin.
Stefan illustrates that equities tend to outperform other asset classes by a healthy margin.

Almost half of all collective investment scheme investors have opted for funds in a mixed asset class portfolio, with a staggering R94 billion allocated to these funds over the 12 months to the end of June. The Association for Savings and Investments South Africa (Asisa) says investors like the idea of achieving diversification across asset classes within one fund  with an expert fund manager determining the appropriate mix.

There’s a price to pay for this conservative approach, with Asisa CEO Leon Campher cautioning that investors can’t expect these funds to outperform pure equity funds. ‘But you can expect a multi-asset fund to outperform inflation and cash,’ he says.

Wealth manager and investment consultant Stefan Keeve advocates looking at your asset allocation decision much like you would a journey. In this blog, he has put together a chart to illustrate how the different asset classes have performed over the medium term.

In a nutshell your choices go like this: the route via equities will undoubtedly produce the highest returns for you over time, while getting to your destination is likely to include some pulse-stopping moments. If you want to sit back, close your eyes and get to the end point feeling rested and relaxed, the path you should choose is a fund that includes all the assets. Expect to feel some disappointment, though, when you compare what you’ve got with what other investors have achieved. 

Ultimately the decision seems to boil down to how much stress we can cope with when equity markets are rocky. And, as the collective investment scheme industry’s flows indicate, for most of us that’s not very much. – JC

Choosing your investment journey

By Stefan Keeve*

The mention of investment journey is in reference to the upside potential and downside risks that are inherent when choosing investments that have different risk profiles to money market investments. The rationale is that the higher the risk of the instrument, the higher the payoff to compensate the investor for taking on the additional risk. Naturally this is not a linear relationship but generally holds over the long term (in excess of 5-7 years).

The graph (below) shows the losses made in the 2008 crash and the subsequent returns achieved by the different indices. From the below, it is clear that an investor who was invested solely in bonds would have experienced a slight uptick during the crash in 2008, but in subsequent years would have struggled to keep up with the returns made by the South African equity market. Investors in a typical money market fund would hardly have experienced any volatility over this period but the graph shows that the performance thereof lags all other investments. While equity markets do experience greater losses, the returns in bull markets typically make up for the initial losses. The chart shows that this is the case, although returns for global equities haven’t been as stellar as local and emerging markets.

Stefan Keeve shows you the different investment journeys you could have taken, depending on your risk appetite.
Stefan Keeve shows you the different investment journeys you could have taken, depending on your risk appetite.

Blending different assets classes wisely can have the effect of limiting losses and reducing volatility when compared to a pure equity investment. By investing into multi asset funds (the chart above uses the average Multi Asset – High Equity fund as a proxy) investors are able to reduce their losses in bear markets and then participate in a significant portion of the upside.

The above chart clearly illustrates the different ‘investment journeys’ that investors can take. Should there be a willingness to suffer larger losses over shorter periods, investors can expect to be compensated with excess returns over the long term when compared to lower risk investments.

The above argument is dependent on being invested in an index. Investments in actively managed unit trusts or share portfolios would have resulted in different return profiles that would leave the investor either better or worse off depending on the success of the particular manager.

At Seed we understand that different clients have different needs, especially in terms of the level of risk taken on. Before any investments are made, a recommended strategy unique to the client gets formulated which determines the optimal level of risk that the client should take. The recommended strategy takes into account the entire portfolio, as no investment should be viewed in isolation.

We believe that the limitation of permanent capital losses is vital to the overall success of any investment strategy and are therefore proponents of diversifying into more than one asset class and geographical location. This will take the client on an investment journey that will be more robust in an ever volatile environment.

* Stefan Keeve is a wealth manager at Hereford Group and an investment consultant at Seed Investments in Cape Town.

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