There has been a growing sense of anxiety among investors about sluggish market performance.
Over the last five years, the JSE has effectively been flat. During the course of 2018, the US equity market was the only market to show meaningful upside, but it too has erased its gains.
“The last five years have been directionless, and if longevity and compounding are the two edges of the sword that you have to deal with, [it has been] a hard environment,” Dr Adrian Saville, founder and chief executive of Cannon Asset Managers told delegates at Moneyweb and Liberty’s Retire Well Masterclass.
Andrew Vintcent, portfolio manager at ClucasGray Asset Management, said the poor investment outcome of the last few years was not only because South African equities have done so poorly, but due to rand movements. Global equities have not necessarily offered attractive rand returns either. The bond market hasn’t quite played ball, and the property market – which has been the go-to safe haven for a long time – has been extremely disappointing.
For investors – particularly those wanting to draw an income from their savings in the next decade – the situation has been concerning, said Janet Hugo, certified financial planner at Sterling Private Wealth.
Even balanced funds – those funds commonly used to save for retirement – have struggled to stay ahead of inflation.
Returns jump quickly
“It is worrying, but your advisor should be telling you to stay the course because those returns jump quickly when they do,” Hugo said.
Against this poor return background, the urge to switch into cash-type investments that have offered slightly better returns and more certainty has been significant, but as life expectancy continues to rise, even pensioners still require growth assets in their portfolios.
Many investors expect to pass away shortly before their 80th birthday, but the reality is that many are still very active well into their seventies and that a lot of people will live another 30 years after they retire.
“So plan your cash flows accordingly. Don’t get stuck on short-term returns.”
To keep investors on board, particularly those in retirement who need to draw an income, Hugo believes “liability matching” is an appropriate approach. This effectively matches various buckets of money with different asset allocations to cash flow requirements at various points in the future.
If an investor needs to draw money from a bucket this year, the money will be invested in a money market-type fund. Money required in three years’ time will be invested in a low risk income-type fund, while money needed in five to 10 years will be allocated to a balanced fund or similar investment. Where an investor only needs to draw an income from the money in 10 or 20 years’ time, this money can be invested in an equity fund.
While this doesn’t take away the risk of underperformance, it does remove the risk of locking in losses and allows the money to be invested for an appropriate time frame, Hugo said.
Although some clients may be risk-averse and prefer conservative investments, it is important to help investors understand that the real risk they face is inflation, and that unless they include appropriate exposure to growth assets in their portfolios over an appropriate time frame, they will not be able to beat inflation in the long run.
“If your money is in the bank that is definitely not a safe investment strategy for the long term.”
It is important for investors to get their asset allocation right, Saville added.
If investors lived on Mars and were allocating capital to the world, they would probably not allocate more than 1% to South Africa, but since local investors have rand liabilities that they need to settle in rands, that is not an appropriate strategy for most.
While there have been arguments suggesting that the JSE is broken and that investors should get their money out, the despondent sentiment around the JSE should be seen in the context of a lost decade where real earnings in South Africa are at levels similar to those reported during the global financial crisis.
Saville said their expectation is that the economic environment will get materially better under the leadership of president Cyril Ramaphosa, but not miraculous.
“That will help equity returns.”
Not all doom and gloom
While the period of low returns has been uncomfortable, it has presented some extraordinary opportunities, Vintcent said.
Saville said there are big local companies that offer incredible value. One example is Telkom, which is trading on a very undemanding price-earnings (PE) multiple and has an attractive dividend yield – and the value of its property portfolio is almost equivalent to its entire market cap.
There are several opportunities in the local market where the PE multiples are so undemanding that if these shares were to rerate anywhere near their long-term averages and earnings only grew moderately, the upside could be significant, Vintcent added.
The average PE of ClucasGray’s equity fund is currently around 10.4, while the JSE’s is closer to the mid-teens.
“So that is a very attractive opportunity set, we think, and the average dividend yield is about 4.5%.”
ClucasGray’s internal SA Inc index of eight well-known companies that have been listed for the last 20 years has only offered dividend yields at these levels twice over this period – in 2003 and 2008.
“To us that is very exciting because both those periods were the beginning of what turned out to be an extremely good period of performance for many of the SA Inc names.”
He cautions however that the SA Inc story requires a reasonable performance from the local economy.
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