This is the message from Prudential Fund Managers. Their key points follow:
Studies show that a person’s pain from a loss outweighs the joy they would experience from making a similar gain. This makes it difficult for investors to weather a downturn. After a period of poor performance, they instinctively want to switch into better performing cash assets.
Over the last three years the average equity unit trust has returned 3.6% p.a., well below the money market return of 7% p.a. (after fees).
Over the last 40 years, South African equities have returned 8.2% p.a. (after inflation), way ahead of cash of 1.8% p.a. (after inflation) and bonds of 2.8% p.a. (after inflation).
Historical cycles show that equity returns outperform cash returns when interest rates fall. Currently the SA interest rate cycle has turned down, which supports a rise in equities.
The problem is when equities turn it can be a sharp move (10% to 20% either way) resulting in not being able to switch out of cash in time and valuable returns being lost.
Local equities are trading just below their long-term fair value. Prudential estimates equities to return 12.8% p.a. over the next 3 to 5 years. Listed property should return 12.6% and bonds 9.2%. All well above money market of 7.5% p.a.
The Rand is around 10% overvalued and could strengthen over the medium-term. This would provide overall lower returns from foreign markets.
Investors should be more positive about the investment environment than the prevailing news headlines would indicate. However, the road to realising these returns is rougher than cash as they are delivered unevenly over time. Investors should be brave and stay invested which will prove to be invaluable down the road.
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Investonline’s view
Although we broadly agree with Prudential’s views, we believe that currently there are areas of investment that are far riskier than others. These are US equities and developed market bonds. In contrast, Emerging markets and SA locally-focused equities appear to offer relatively more value.
The key issue is to ensure that your investment carries the appropriate amount risk that suits your goals. Often, we see retirees that require a stable 10% annual return being overly invested in risky equities, which is not necessary to achieve their desired returns. One must match your risk with your return expectations.
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