We all know about “long-term investing giving the best returns over time” and “you can’t time the market”. This is true. But, many investors cannot stomach losing money in the pursuit of long-term returns. This is natural as the uncertain time line to profitability can seem an eternity. To cope with this anxiety “of my investment going backwards”, here are some alternatives:
A fixed deposit
The best 5-year fixed deposit with a long-standing institution is 8.95% per annum. The massive downside is, in 5 years, it’s highly likely equities will recover and you will miss very valuable higher returns. There is no flexibility here.
The best 1-year fixed deposit with a long-standing institution is 8.2% per annum. Again, the massive downside is that markets recover in a year and you miss very valuable higher returns. There is no flexibility here.
In selecting a fixed deposit, you get a guarantee from the bank. However, the guarantee is only as good as the bank’s balance sheet and lending practices. Hence, we list “long-standing institutions”. These are mostly our big five banks. There are other banks/institutions offering higher fixed returns, but we would caution you on how secure your investment really is in choosing them? The simple example is the collapse of African Bank where many investors lost their savings.
Unit Trust Income Funds
These are unit trusts that invest in bank money-market funds and other higher yielding investments, such as bonds, preference shares and property. These funds do not guarantee your investment returns like a fixed deposit, but if one understands the risk management of the fund and selects the right funds, your risk of lower than expected returns are very small. The key advantage of investing in the right income fund is your immediate access to your investment, which will allow you to switch into higher growth assets (equities), which will allow you to get into higher returns when equities are recovering.
An Income fund that we have researched and analysed before recently meeting with the fund manager, is the Prescient Income Fund. This fund has given the following net annual returns (after fees) of:
1 year 8.90%, 3 years 9.51%, 5 years 9.25% and 10 years 9.37%.
Source: Fund house annualised to 29 June 2017
(See Prescient Income Fund MDD at Investonline.co.za)
These consistent returns are due to strict risk management from a very experienced fund manager, who is probably the best income manager in the country.
The fund is very low risk and its objective is to provide a return of CPI of +3% per annum, currently around 9%, and has never had a capital decline over a 3-month period. The fund has achieved its objectives over time and we recommend an investment in the fund.
The fund uses hedges to mitigate risk and currently it is exposed to virtually no risk.
Allan Gray Optimal Fund (See MDD at Investonline.co.za)
The fund is a unique unit trust that operates similarly to a hedge fund. The fund’s performance is a function of the best equity researched ideas from the Allan Gray team. Shares are selected relative to the stock market index that should out or under perform. It then uses derivates to reduce its net equity exposure to ranges from 0% to 20%.
The fund’s aim is to provide long-term positive returns higher than money market rates, irrespective of stock market returns. This fund has given the following net returns (after fees) of:
1 year 9.2%, 3 years 10.4%, 5 years 8.6% and 10 years 7.7%.
We like both the fund and its concept, as Allan Gray is implementing their well-researched ideas with minimal overall stock market exposure. The fund is fairly low risk and should provide a 3% to 4% return above money market with virtually no taxable income. i.e. a far higher after-tax return than taxable interest earned in fixed deposits and income funds.
Source: Fund house annualised to 29 June 2017
Prosperity IP Worldwide Flexible Fund of Funds (See MDD at Investonline.co.za)
This is a conservative fund that preserves capital and seeks opportunities to enhance returns. It invests when irrational market prices present themselves. Although its mandate is moderate risk, in times of market uncertainty, the fund adopts a very conservative strategy that should still yield above money market returns.
The fund is managed by Nick Brummer and Rod Lowe that each have more than 25 years of investment experience.
This fund has given the following net annual returns (after fees) of:
1 year 3.3%, 2 years 7.9%, inception (19 September 2014) 8.6%.
Source: Fund house annualised to 29 June 2017
Although the fund’s performance over the last year has been below money market, it has outperformed its global, balanced benchmark, reflecting strong risk management.
Investonline Recommended Conservative Portfolio
This portfolio comprises a selection of four conservative unit trusts. Income funds and diversified low-risk, multi asset funds. This is a low-risk portfolio, but does carry the most risk of the four alternatives. What it does afford you, is slightly higher returns with some of its limited equity and offshore exposures.
This fund has given the following net annual returns (after fees) of:
1 year 3.5%, 3 years 7.3%, 5 years 8.9% and 6 years 9.0%.
The recommended portfolio continues to outperform the industry average balanced unit trust of 3.0%, 6.5% and 8.8% over the last one, three and five years respectively.
We like this portfolio as it provides diversification and better immediate returns when the market recovers.
Conclusion
If you don’t have the stomach for low or negative returns, we recommend investing into a portfolio of select Income Funds, which should give you steady, inflation-beating returns and the flexibility to move quickly back into growth assets when markets start recovering.
Fixed deposits may provide immediate comfort, but the longer term pain of not participating in invaluable higher market returns while your money is stuck for 5 years, is not worth the investment.
To have the benefits of “the right way to invest” which is long-term investing, Investonline’s recommended Conservative Portfolio provides you with capital preservation and better long-term returns.
Please contact one of our advisors to assist you with making the right investment choice.