Ride out market lows

It was all big smiles at the annual Personal Finance/PlexCrown/ProfileData Raging Bull Awards dinner held in Sandton last week to recognise excellence in the unit trust industry. A major factor that contributed to the joy was the unexpected surge in equity markets over the past year.

I know of no one who correctly predicted at the beginning of last year just how well the South African equity market would do.

The FTSE/JSE All Share Index (Alsi) started 2012 at 31 986 and ended at 39 250 – almost 23 percent up, while the inflation rate was about five percent.

A real (after-inflation) return of 18 percent is not bad for a year that started with nearly every local investment pundit and asset manager warning investors not to expect a repeat of the good returns that had become the norm over the previous 10 years.

Unfulfilled predictions, however, can work both ways. Back in 1998, when nearly everyone, apart from a few prophets of doom, was expecting the good times to roll on, there were a series of crises. The main one was the bursting of the techno-logy, media and telecommunications bubble, and South Africa was also hit by investors punishing emerging markets.

Most market crashes are violent and very sudden, depressing stocks to well below their intrinsic values. Investors often panic and, instead of leaving their money where it is, flee to the presumed safety of money market funds. As a result, investors lose out when markets bounce back and rise above their previous highs.

Currently, the JSE is reaching new record highs nearly every day. I am sure of one thing: there will be a reversal. But I cannot tell you – and nor can anyone else – exactly when this will happen or by how much the market will fall.

However, I can tell you that the market will recover and that more record highs will be broken.

Nearly all markets rise over the long term. Japan’s market is the big exception: it crashed in 1992 and has never recovered, but this was a special case based on ridiculous property values.

The graph that accompanies this column (see link at the end of this article) shows that the South African market has risen and fallen, but the overall long-term trend has been for it to rise.

I asked Old Mutual to provide me with the performance statistics for its grand old lady, the Old Mutual Investors’ Fund. On the whole, the fund plods along, neither providing stellar performance nor bombing out.

I chose January 1, 1996 as the inception date for the investment, because 1996 was the year in which Personal Finance was launched and the first Raging Bull Awards were presented. Your R10 000 investment, if you had reinvested all the dividends, would have been worth R95 910 on December 31, 2012 – a return way ahead of inflation, although it is lower than the total return of the Alsi.

The graph not only shows the importance of riding out the market lows, but it also demonstrates how important it is to reinvest your dividends. This is simply compounding the returns on the returns you have received – in this case, a R33 000 fillip.

The Association for Savings & Investment SA (Asisa) chose the day on which the Raging Bull Awards were held to present its statistics for 2012. There is now R1.2 trillion in collective investment schemes, including unit trust funds and exchange traded funds. The R1-trillion barrier was breached in the same year as government presented a budget of R1 trillion to run the country from March 1 last year to February 28 this year.

One trillion rand is a heck of a lot of money, and the good thing is that it all belongs to ordinary individuals to whose lives it will one day make a huge difference.

The Asisa statistics also show, disappointingly, that many investors are still trying to time the markets – without much success.

Peter Dempsey, deputy chief executive of Asisa, says the roller-coaster behaviour of the stock markets at the turn of the millennium was too much to bear for many South African investors. Unwilling to brave future stock market volatility, they opted for interest-bearing investments, such as money market funds. They were happy to accept the interest rate of 13.5 percent on offer at the time as a satisfactory return for the long term.

“Many settled into this comfort zone, refusing to sacrifice the perceived safety of cash, even when interest rates started dropping.

“These investors paid a high price for their cautious approach in that they sacrificed the inflation-beating returns delivered by equity investments over the longer term,” he says.

Dempsey says that if you had invested R100 000 in the average domestic general equity fund 10 years ago, your lump sum would have grown by R435 483.

If you had been more cautious and opted for the average asset allocation prudential variable equity fund, you would still have realised a return of about R307 025 after 10 years.

However, the ultra-cautious investor who left the R100 000 in the average money market fund for the past 10 years would have seen it grow by a mere R116 894.

Dempsey points out that the equity return was achieved despite the extreme stock market volatility that followed the global credit crunch in 2008 and the subsequent debt crisis in the eurozone.

Leon Campher, chief executive of Asisa, says correctly: “It is a fallacy that you can time markets. It is not such a cool idea. Not even most asset managers can get it right. You need to make a decision and stick to it.”

In other words, the way to invest for the long term is to choose an investment structure based on the returns you require at an acceptable level of risk, and then to ride out the ups and downs.

Incidentally, the main Raging Bull Awards are based on the Plexcrown Fund Ratings. These awards are not simply for out-performance; they go to the fund managers who provide consistently good returns at an acceptable level of risk. It is these funds and companies you should seek out.

NOSEWEEK GETS IT WRONG ON RECLAIMED PENSION SURPLUSES

Personal Finance has again become the target of misinformed reporting in Noseweek magazine.

Previously, the magazine falsely accused Personal Finance of being involved in a conspiracy, which it claimed had resulted in J Arthur Brown being unfairly charged with various criminal offences following the collapse of Fidentia.

In its latest edition, Martin Welz, editor of Noseweek, writes: “On 20 March 2011, Personal Finance reported under the headline ‘Victory for pensioners who lost their surpluses’ that: ‘After a wait of more than 15 years, about 15 500 pensioners and members of seven pension funds, whose surpluses were stripped by employers in the early 1990s, will be paid out a total of R730 million within the next six months.’ It’s now some 22 months since this article was published and nothing has been paid out.”

The broader article is an almost slavish repetition of the grand conspiracy theory and vilification campaign run by Simon Nash, executive chairman of appliance company Cadac, who is standing trial on charges related to the stripping of surpluses from funds in the 1990s.

The targets of the vilification campaign have included the Financial Services Board (FSB) and its chief executive, Dube Tshidi; the National Prosecuting Authority; and Tony Mostert, curator of retirement funds that were stripped of their pension surpluses by employers.

The Noseweek article has resulted in allegations being levelled – including by the Nash camp – against Personal Finance, in particular that this publication has not campaigned for the money that Mostert has recovered to be repaid to the pensioners who are entitled to a share of it.

Although Personal Finance is quoted correctly in Noseweek, the claim that nothing has been repaid to the pensioners is untrue.

Personal Finance has been keeping a close watch on the laborious process of tracking down the pensioners who are entitled to a share of the money, and we have reported on the payments.

The reclaimed money and the payments are not controlled by Mostert but by Old Mutual and actuarial consulting company Towers Watson.

This week, the FSB’s chief actuary, Marius du Toit, and Towers Watson actuary Erich Potgieter both confirmed that R252 372 349 had been paid out to 6 188 former members of the affected retirement funds by January 28 this year.

Potgieter says: “I am satisfied that the balance of the assets destined to be distributed remains invested with various financial institutions in the names of the funds, and that significant progress is being made with the payment of stakeholders.”

Welz has since backtracked after being challenged by Mostert, and has removed the article from Noseweek’s website. According to Mostert, Welz has agreed to publish a retraction.

Welz did not respond to emails from Personal Finance.

Graph: Performance of Old Mutual Investors’ Fund


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