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Why investors should remain patient and avoid the perils of performance-chasing

To quote billionaire investor Warren Buffet, ‘the investor of today does not profit from yesterday’s growth’.

For several years now South African investors have received little reward for taking risk – particularly those invested in South African equities and/or listed property companies. Those invested in low or high equity (regulation 28 compliant, pre-retirement capital) funds and portfolios haven’t been much better off due to disappointing returns over the past five years. The poor returns can be attributed to a range of factors, with limits on offshore allocations combined with disappointing local equity returns at the fore.

The poor returns have introduced a far higher rate of churning between investments than in previous years. It’s human nature – in times of low returns, investors look at previous winners and switch their investment to include these performers, hoping for the same outcome as in the past.

To quote the legendary Warren Buffet, ‘the investor of today does not profit from yesterday’s growth’. As much as we are warned that past performance is no guide to the future results, many investors still switch to the latest hot offerings just before the inevitable slump in performance.

Morningstar recently conducted research into the area of investor returns and created a hypothetical ‘Performance Chaser’ portfolio. This portfolio sees investors switching their investments into the best performing fund from the previous year at the start of each calendar year. This is then compared to two portfolios managed by Morningstar – the Morningstar SA Multi-Asset Low Equity and SA Multi-Asset High Equity portfolios.

The research aims to illustrate, by means of comparison, the returns achieved by the performance chasers versus the returns achieved by investors that remained invested in their respective portfolios over the same time frame.

 

Fig 1: Low Equity: Performance chaser vs Morningstar Cautious

Fig 2: High Equity: Performance chaser vs Morningstar Adventurous

As can be seen in the above two graphs, the difference in the returns were quite astonishing.

The Morningstar low equity portfolio returned 6.3% more than the Performance Chaser portfolio over a period of four years. In other words, an investor with an investment of R1 million that stayed the course (and remained invested in the Morningstar low equity portfolio) would have gained an extra R63 095 in returns. 

The difference is even more pronounced in the high equity portfolio. In this case, the Morningstar Adventurous portfolio returned 13.93% more than the Performance Chaser portfolio over a period of four years. In other words, an investor with an investment of R1 million that stayed the course would have gained an extra R139 269 in returns. 

The above scenario clearly highlights the benefits of staying invested in a robust and consistent strategy as opposed to backtracking and chasing yesterday’s winners.

Let us examine the possible reasons for the underperformance of yesterday’s winners:

  • The selected funds’ good ideas have all paid off and the returns have been realised.  
  • They may have had an aggressive view that played out in their favour. It’s unlikely that the view will continue for the foreseeable future and could potentially be the top of the return cycle when an investor invests into the fund.
  • This view could have been pure luck and not a solid investment thesis that the manager followed. For example, the fund could have been underweight offshore and then the rand strengthened due to a global risk on trade. 

What does this mean for investors?

Returns don’t happen in straight lines and it seldom occurs when one expects it to.
It’s vital to separate emotion/sentiment from an investment portfolio. Often the most beleaguered investments turn out to be a great opportunity for future returns, as investors can access these investments at a good price.

Volatility creates opportunity and short-term underperformance can translate into a solid, longer-term upside. 

Trying to chase performance can be extremely harmful to an investor’s returns over the long-term. It’s rare for even professionals to consistently time investment in to and out of the market over time. In addition, one needs to consider the costs of trading funds, which is likely to only make matters worse.

A well-diversified portfolio that is designed to meet your investment goals whilst remaining within your risk tolerance is a far better solution, and much likelier to result in long-term investment success than trying to buy yesterday’s winners.

The Bottom line: investing is a marathon and not a sprint. If you have a five-year investment horizon, remember to keep a long-term view – don’t worry too much about your returns for the first three to five years. When it comes to investing, patience is rewarded.

Victoria Reuvers is the director and senior portfolio manager at Morningstar Investment Management South Africa. 

The views and opinions shared in this article belong to their author, cannot be construed as financial advice, and do not necessarily mirror the views and opinions of Moneyweb.

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I am looking at the future and with SA Inc being a risky dump that will just go from bad to worse I will stay out.

Those running this country has no ability whatsoever to do so, so don’t kid yourself.

Why would you take a massive risk on a small substandard market if you have the rest of the world to invest in? Do you expect to get compensated for the risk? Hahaaa.

Agree, just like healthcare, education, security etc etc we are on our own. And just like these services, active management is crucial. The idea of waiting five years for an investment to show positive returns is preposterous – I monitor all my funds, as well as those I’m considering investing in, on a monthly basis and against multiple benchmarks that are relevant to my circumstances. I relied on the opaque reporting of investment managers for far too long.

South Africa is only on dirty shirt in a basket of soiled shirts. This is not your dad’s market anymore.
In China, the Shanghai composite is now back where it had first been over 12 years ago, and it’s down 53% from its peak in Oct 2007.

Japan’s Nikkei index is back where it had first been in 1986, and is down nearly 50% from the peak in 1989. That was 30 years ago. And the index is also down from two years ago.

In Germany, the DAXK which is comparable in its structure to the S&P 500, is back where it had first been in 1999.

In the UK, stocks reached a new high in May 2018 but have since fallen off. Currently, the index is just 7% above where it had first been in December 1999. So it made 7%, not per year, but over the course of two decades.

The French stock index is back where it had first been in 1999 and is down 24% from its peak in 2000.

Italian stocks are still down 60% from their peak in 2000.

Spanish stocks are down 45% from their peak in 2008 and are below where they’d first been in 1999.

The Canadian stock index, the TSX, is up about 10% from its prior peak in 2008, with a huge plunge in between. So that’s a gain of less than 1% a year. Not even keeping up with inflation.

The entire world as come to invest in the S&P 500 because it was the only big index that was thought to be going anywhere, and this money-flow from around the world has helped inflate it.

But American companies are no better than German or Japanese companies. Far from it. They are, however, very good at financial engineering – which is not a beneficial long-term strategy.

And the fact that the S&P 500 has continued to surge, while nearly all other markets with stable currencies have been shitty, is not proof that this outperformance will just continue in the same manner.

The blind exuberance about stocks and just about all other asset classes in the US tells me that there may not be a lot of eager buyers left to keep inflating every corner of the vast Everything Bubble. Signs of that are already everywhere.

Central banks have not been able to levitate those other stock markets, despite all their efforts. This includes the efforts by the Bank of Japan, whose huge QE program includes buying equities. In the end, there is no cure for a bubble other than unwinding the bubble. And this – as those other stock markets have shown – can take decades of down-trends, where buy-and-hold is a losing strategy, and where lucky market timing is the only thing that works, but where unlucky market timing is profoundly destructive.

South Africa is only one dirty shirt in a basket of soiled laundry. This is not you dad’s market anymore. In China, the Shanghai composite is now back where it had first been over 12 years ago, and it’s down 53% from its peak in Oct 2007.

Japan’s Nikkei index is back where it had first been in 1986, and is down nearly 50% from the peak in 1989. That was 30 years ago. And the index is also down from two years ago.

In Germany, the DAXK which is comparable in its structure to the S&P 500, is back where it had first been in 1999.

In the UK, stocks reached a new high in May 2018 but have since fallen off. Currently, the index is just 7% above where it had first been in December 1999. So it made 7%, not per year, but over the course of two decades.

The French stock index is back where it had first been in 1999 and is down 24% from its peak in 2000.

Italian stocks are still down 60% from their peak in 2000.

Spanish stocks are down 45% from their peak in 2008 and are below where they’d first been in 1999.

The Canadian stock index, the TSX, is up about 10% from its prior peak in 2008, with a huge plunge in between. So that’s a gain of less than 1% a year. Not even keeping up with inflation.

The entire world as come to invest in the S&P 500 because it was the only big index that was thought to be going anywhere, and this money-flow from around the world has helped inflate it.

But American companies are no better than German or Japanese companies. Far from it. They are, however, very good at financial engineering – which is not a beneficial long-term strategy.

And the fact that the S&P 500 has continued to surge, while nearly all other markets with stable currencies have been poor, is not proof that this outperformance will just continue in the same manner.

The blind exuberance about stocks and just about all other asset classes in the US tells me that there may not be a lot of eager buyers left to keep inflating every corner of the vast Everything Bubble. Signs of that are already everywhere.

Central banks have not been able to levitate those other stock markets, despite all their efforts. This includes the efforts by the Bank of Japan, whose huge QE program includes buying equities. In the end, there is no cure for a bubble other than unwinding the bubble. And this – as those other stock markets have shown – can take decades of down-trends, where buy-and-hold is a losing strategy, and where lucky market timing is the only thing that works, but where unlucky market timing is profoundly destructive.

@Oubok. Agree, markets have not been too great abroad either…..as someone said “It’s the US stock market (that has done well) versus the rest of the globe (which struggles with returns)”

But in SA’s case, there’s extra layer of value destruction to bear in mind (as we keep lagging behind most Emerging Market’s growth) due to socialist, political factors.

Considering a safe asset class (or region) abroad, do you perhaps have your favourites for MW readers?

I would think, perhaps Gold ETF (as safe haven against global equities), but Gold’s train already left the station.
Global bonds (esp in the US) has done extremely well, but there’s limited scope for further global interest rate cuts. Bonds could be at a high, with more downside risk than upside(?)
Then there’s Global REIT/Property….but in any global recession, valuations will also be hit (albeit with lower volatility).
Then there’s USD, Euro, GBP, AUD, CHF, NOK cash portfolios, but return on interest is miniscule (except if the reason to keep it, is protection against further depreciating ZAR).

Perhaps an asset spread across Asia-specific (ex-JPN) emerging market global region?

The risks of investing in SA are so huge that it’s not a matter of chasing high returns any longer, but how to get your money out of here, even if overseas returns are low. Regulation 28 RAs are about as risky as Ponzi schemes right now. When the rand hits 20, 30, 40 to a dollar due to the communist regime’s madness, it matters very little whether you’re getting 5% or 10% in rand terms.

Unfortunately Warren Buffets insights no longer apply to S A conditions.
The writer has a vested interest in this matter, and traditional Investment protocol is obsolete.
The S A environment has changed, for good, a d not for the better.
Investment Companies stand to lose big, their plush offices, fancy cars and salaries are about to implode.

They will probably do more than OK milking retirement funds. It’s like shooting fish in a barrel.

Maybe they won’t make enough for individual executives to blow R500m on an investment again, but they will do OK.

A quick google search finds no data on these Morningstar funds. (SA Multi-Asset Low Equity and SA Multi-Asset High Equity portfolios)

Do they actually exist?

So hypothetical comparisons on hypothetical funds with hypothetical returns and management fees tends to be meaningless.

Pity!

They certainly do exist and are actual performance numbers (net of fees). You won’t find data on them as they are model portfolios, not funds. Morningstar offers a range of discretionary managed portfolios to advisers – please see http://www.morningstarportfolios.co.za for more info.

South African equities aren’t even one percent of the world market so reducing South African exposure, especially with poor economic growth being the status quo, just makes sense. It’s time to break up with listed equities. The “unofficial investment strike” continues & It’s clearly not about returns but rather liquidity.

“Trying to chase performance can be extremely harmful to an investor’s returns over the long-term.”

There is no reason to doubt this. Many of the top 20 performers over 10 years are below 50 ranking on a 3 and 5 year measurement.

Is it time to ditch them for the few that consistently appear in the top 20?

Oh yes it is! check out Sygnia’s skeleton balanced 60.

Its first in its sector and top quartile consistently

There is a subtlety that often escapes people: forecasts are made with historical volatility figures, yes, but the other part of the mathematics is the expected return, which is not derived from historical returns.
As with anything in the future any prediction by a forecaster is also an educated thumb suck.
If you think like a good pension fund manager should, with responsibility of hundreds of billions of dollars, how would you invest?
You would want to think VERY VERY long term, with a preconceived strategy and ensuring that your portfolio can capture the primal drivers of market growth and returns.
In response to many of the commentators doom and gloom, I hope they see beyond their own short sightedness.
Perhaps when all is said and done, South Africa will reach a turning point…I think we are bouncing along the bottom at the moment. Thereafter everyone will be very motivated to get back on track. It could just get sordidly worse OR there may be a period of abundant opportunity.

I think there is great opportunity in buying a good selection of 10-15 different shares on the JSE. Maybe I am just completely wrong. But, I find it hard to believe to that certain strong businesses in South Africa, particularly those also diversified in Africa, and somewhat offshore, are going to do as badly as market seems to think/have priced in. Yes, I think there is a 5 to 10 year period ahead, with significant volatility. I also don’t think the US market is attractive to buy more stocks at the moment – its exceptionally pricy in my opinion.

As an example of what I mean. Look at the Discovery share price. There is no way that events over the last two years justify that drop in share price, especially if you look at how the company has been expanding and growing. If people really think that NHI (to be “implemented” in 2026) is going to be that damaging to the Discovery share price (today) … then I say to you thank you very much for the bargain!

Completely disagree with article to stay invested. Why must volatility only benefit the fund managers? I have proofed over the years that by combining technical analysis with a unit trust fund switching strategy that it is possible to outperform general equity and balanced funds.

Furthermore, there is still huge downside stock market risk globally because of recession risks globally. The informed investor knows better than to be convinced by an article like this one.

Informed buying and switching decisions, can make a huge difference. With this approach volatility can be a friend.

The Gryphon multi asset approach embraces the rational thought raised in these comments – 100% in equities or 100% out dependent on proprietary indicators. Annual management fee of 35bps…sterling performance over 5 years…sitting in cash since August last year.

A sensible article which deserves careful consideration, but I suggest the principles are better applied to a globally managed and suitably diversified equity discretionary portfolio, rather than a strategy limited to one geography.

@MichaelfromKlerksdorp. See Mike Schusslers column today. I’ll not be surprised to see au get monkey hammered shortly, if it goes back to $1300 load up.That being said…au needs to go to $2500 just to equal the 1980 high.
It has been said to make money in the market get out early.
Sit the next year out, enjoy the beach.

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