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Keeping perspective in the market turmoil

It’s still the long term that matters.
Investors should be careful about assuming that managers that delivered positive returns over this period must be good and those that didn’t must be bad. Image: Shutterstock

The last few days have seen some of the most extreme market volatility in decades. From levels of over 57 000 at the start of 2020, the FTSE/JSE All Share Index (Alsi) has fallen to below 40 000.

On Thursday last week the market was in the extraordinary position that every share in the index was in negative territory.

At the same time, South African 10-year government bond yields have spiked from 8.25% at the start of the year to above 10.5%. As yields go up, bond prices fall, which means that investors in these assets have seen the value of their holdings decline.

Funds tracking the JSE All Bond Composite Index are down over 4.5% in the last month alone.

Taking pain

This is an incredibly difficult environment in which to manage money. Local fund managers have had nowhere to hide, apart from the safety of cash if they had the ability and conviction to move out of the markets.

Just how challenging this period has been is illustrated by the performance of multi-asset flexible funds since the start of the year. These unit trusts have the ability to invest across asset classes, without any restrictions. Portfolio managers are therefore allowed to move into whichever investments they deem most appropriate at any given time.

Up until the end of last week, only five of the 93 funds in this category had posted positive returns for the year to date. The majority of flexible funds were down more than 10%.

Over a one-year period, the figures were not much better. Only eight funds in this category were up over the previous 12 months.

Protection

The managers who have been able to protect capital over this period have obviously provided their clients with a great deal of comfort. When the Alsi is down 22.6% in less than three months, investors can feel pretty good about being in a unit trust that has given a positive return.

Critically, this is likely to give them the confidence to remain invested. Selling out at times like these and realising losses can destroy significant wealth over the longer term.

Read: This is how much your investment behaviour is costing you

These managers have also made things much easier for themselves when the market turns. Funds that have lost 15% or 20% first have to make that back before they even start recording gains. Those that limited their losses are starting the recovery at a significant advantage.

Good managers, bad managers

However, investors should be careful about extrapolating from this that all the managers that delivered positive returns over this period must be good, and those that lost the most must be bad. Although this has been an extreme event, it is also a short-term one.

Investors should be far more concerned about what their fund manager is able to deliver over much longer time periods. It is therefore highly instructive to look at the top-performing South African flexible funds over the last 10 years, and compare this to their performance for the year to date.

Performance of SA multi-asset flexible funds
Fund 10 year annualised return Return year-to-date
Centaur BCI Flexible Fund A 12.91% -14.67%
36ONE BCI Flexible Opportunity Fund A1 11.94% -3.58%
BlueAlpha BCI All Seasons Fund A 10.72% -6.51%
Autus Prime Opportunity Fund A 10.17% -8.23%
Long Beach Flexible Prescient Fund A1 10.11% -14.52%
Montrose BCI Flexible FoF 9.77% -12.84%
Visio BCI Actinio Fund A 9.16% -17.20%
Noble PP Stanlib Flexible Fund A 8.11% 0.72%
PSG Flexible Fund A 8.07% -22.64%

Source: Morningstar

There are two striking things about this table. The first is that of the nine best-performing funds over the past decade, only one has a produced a positive return this year.

So while delivering this kind of protection for investors is commendable, it is hardly a guarantee of long term success.

Secondly, some of the funds on this list have experienced significant declines since the start of 2020. Most obviously, the PSG Flexible Fund is one of only five funds to have fallen more than 20% this year.

Yet its long term record is still among the best in its category. Its recent short-term performance is therefore not an indicator of its long-term track record.

The really long term

In fact, it is quite instructive if you compare the performance of the PSG Flexible Fund and the Noble PP Stanlib Flexible Fund from as far back as August 2008. As the graph below shows, their trajectories have been quite different.

Source: Morningstar

The PSG Flexible Fund has always been mostly invested in equities. It therefore underperformed the Noble PP Stanlib Flexible Fund during the 2008 crash as well, but substantially outperformed in the decade that followed.

The PP Stanlib Flexible Fund, on the other hand, has always invested predominantly in cash and bonds. Its return has always been far more stable and linear. It is therefore really no surprise that it has outperformed this year.

This highlights how important it is for investors to look beyond just short-term numbers.

It is critical to understand what you are buying, and how you should expect it to perform over the long term. It is also vital to appreciate that short-term returns are not a predictor of long-term success or failure.

Read: This is what long-term investing looks like

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To see the future you have to look into the past.

Hope is not a strategy. The events of the past 90 days are like nothing any fund manager has seen is their life time purely because the underlying influencing factors have never been what they are today.

It is absolutely pointless trying to sell off portfolios unless they are invested in companies that have an extremely high risk of not recovering after taking into account that the world money system will assist in this crisis like they did in 2008.

There will be, as usual, people who exploit this crisis and make fortunes out of it, which is neither wrong or bad. For SA we are hoping that the powerhouse economies we trade with are using up their resource stock piles and “hope” we have some form of commodity boom when this is all over. No matter what you believe. As this crisis unfolds there is not much we can do but wait and track the “higher risk” shares. One this is for sure, we will get through this, things might be different but we will overcome, there will be great bargains to be had eventually. In the meantime we really need to implement stock trading triggers in the JSE to prevent panic although methinks the horse has bolted.

This article is aimed at people who do not live off their investments. I still have to take money out everymonth from funds which have dropped in value. Do not have the luxury of waiting it out due to age and necessity.

I feel for you Henriques. Note that a few months ago plenty “advisers” were still suggesting that the bulk of your investment be in equities (passive investments being favoured often), maybe some bonds and cash, but not much. One lesson for me is to be very alert to this need to keep a spread.

The market reaction, and especially the media’s, is way overblown. Let’s take the worst-case scenario: everybody gets infected, and 3% of all people on earth die. Many of these 3% are elderly or sick to begin with, so a large percentage of them are not economically active. Will the entire world economy grind to a halt if 3% of the people are no longer with us? Are the remaining 97% of people going to stop working, buying goods, or indeed living? How does this justify a 10, 20 or 30% fall in stock prices?

Incitatus:

As bad as a death is, the economic impacts of the restrictions and supply chain disruptions is multiples of this. To be blunt, if 1m people in say died in the next 5 minutes the impact would be negligible.

There are obvious economic casualties of the restrictions : airlines, hotels, restaurants, etc. There are much bigger less obvious impacts

Schools and preschools close : a parent cannot work in order to care for the kids.
Tens of thousands of containers are stacked up in the wrong ports : millions of tonnes of produce cannot reach their destinations. Whether south african table grapes or chinese smartphones, the effects on wholesalers retailers and manufacturers that need the goods grows exponentially.

Well said. I did read that an analyst said “The markets have priced in the extinction of mankind, which is ridiculous”.

This reminds me of a past MW article, discussing the merits of “actively” managed funds versus “passive” index trackers, ETF’s….where it was said that the active manager has more of an advantage during market downturns, by using intellect to add value (whereas trackers just follow the index down).

So this is a golden opportunity for all active managers to show their mettle, and hopefully beat ETFs/trackers over the next 10 or so years.

I’ll be WATCHING YOU come March 2030!

Apparently a few opportunistic hedge fund marketers are approaching local investors re the benefits of hedge funds. Talk about kicking investors while they are down.

End of comments.

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