Tests on unit trust fund investments in four different sub-categories prove that picking a good-quality fund and sticking with it through thick and thin is likely to provide better returns over the long term than regularly chasing top-performing funds, Glacier by Sanlam says.
Glacier has an investment platform that allows you to choose from and switch among a range of funds.
Glacier tested a buy-and-hold investment strategy against various switching strategies in four South African unit trust sub-categories – general equity, multi-asset high equity, multi-asset low equity and multi-asset income – over 10 years, from January 1, 2005 to the end of 2014. In most cases, the buy-and-hold strategy provided better returns, Kamil Maharajh, an investment analyst at Glacier, says.
Maharajh says the buy-and-hold funds in his comparisons were chosen on the basis of qualitative factors, rather than purely for their past performance. Glacier considered factors such as the size of the manager, the experience and track record of its investment team, and the research support for the investment team.
General equity funds
To compare performance in the general equity sub-category, Glacier chose the Prudential Dividend Maximiser Fund as its buy-and-hold fund. This fund returned, on average, 18.61 percent a year over the 10 years to the end of 2014 and was the sixth-best performer in the sub-category, according to ProfileData.
A R100 000 investment in the Dividend Maximiser Fund on January 1, 2005 would have grown to R551 121 by the end of 2014. Maharajh compared this return with what an investor would have earned at the end of 10 years if, on January 1, 2005, he or she had invested in the top-performing South African equity fund for the year to the end of 2004, the Sanlam Investment Value Fund, and, on January 1, 2006, had switched into the best performer in 2005, the PSG Equity Fund, and had continued the same selection process each year until 2014. In other words, the initial investment was in the previous year’s top-performing fund, and in each subsequent year the investor switched into the top-performing fund of the previous year.
The switching strategy would have yielded R417 729 at the end of the 10 years. The buy-and-hold strategy out-performed the switching strategy by 31.9 percent.
Maharajh tested what would have happened if, over the 10-year period, an investor had switched the investment into the previous year’s top performer only every second, third, fourth, or fifth year.
In each case, except with the switch after five years, the final investment value was lower than the investor would have earned by sticking with the Dividend Maximiser Fund for 10 years.
The comparison did not take into account any switching costs or capital gains tax (CGT), because investors with products such as living annuities on investment platforms typically avoid these costs and CGT. If you switch in and out of unit trust funds directly, you may incur costs that you could avoid by buying-and-holding, and CGT could arise on each switch, not just the final withdrawal.
Maharajh also tested the outcome of starting the investment in the Dividend Maximiser Fund and then switching into the previous year’s top performer after one year, or after two, three, four, or five years. In this case, the switching strategy out-performed the buy-and-hold strategy three out of five times.
Multi-asset comparisons
Maharajh conducted a similar exercise in the South African multi-asset high-equity sub-category, where the Foord Balanced Fund was chosen as the buy-and-hold fund. The fund was the second-best performer in this sub-category over 10 years and returned, on average, 16.8 percent a year over this period to the end of 2014.
An investment of R100 000 in the fund on January 1, 2005 would have grown to R472 979 by the end of the 10 years.
In each case, the strategy of chasing the top-performer over the past year and switching each year, or every two, three, four, or five years, would have resulted in a lower return than investing in the Foord Balanced Fund for 10 years. In one case, the investment in the Balanced Fund out-performed the final return from the switching strategy by as much as 58.1 percent
The strategy of investing initially in the Foord Balanced Fund and switching after a year into the previous year’s best performer, or switching into the previous year’s best performer after two, three, four, or five years, produced lower returns in three out of five cases.
In the South African multi-asset low-equity sub-category, Maharajh chose the Prudential Inflation Plus Fund, which returned, on average, 13.4 percent a year over the 10 years to the end of 2014. It was the best performer in this sub-category over the period.
An investment of R100 000 in the Inflation Plus Fund for 10 years would have grown to R351 554. This is about R100 000 more than an investor would have earned if he or she had invested in the Real Element Income Fund (the best performer in 2004) and, over the 10 years, had switched into the best performer of the previous year.
It is also about R125 000 more than an investor would have earned at the end of the 10 years if he or she had invested in the Income Fund on January 1, 2005 and switched every two years into the previous year’s best performer.
Similarly, Maharajh says, investing initially in the Inflation Plus Fund and switching after a year, or after two years, into the previous year’s best performer would have resulted in a lower final value at the end of the 10-year period than from investing in the Inflation Plus Fund throughout. The buy-and-hold strategy would have returned 25.6 percent and 38.2 percent more respectively, he says.
The last sub-category in which Maharajh tested the buy-and-hold strategy against switching was multi-asset income.
Here, Maharajh chose the Coronation Strategic Income Fund, which returned, on average, 9.42 percent a year over the 10 years to the end of 2014 and was the top-performing fund in this sub-category over the 10-year period.
The buy-and-hold strategy out-performed the strategies of switching annually or every second year into the best performer of the previous year by 7.32 percent and 5.43 percent respectively.
It also out-performed the strategies that started with an investment in the Strategic Income Fund and switched after a year, or after two years, into the best performer to the end of the previous year by 16.37 and 13.64 percent respectively.
Long-term view
Maharajh says the strategy of buying and holding the funds of a good-quality asset manager will out-perform chasing the best past performers, because the investor leaves the asset allocation decisions to an asset manager and takes a long-term view.
“Being able to withstand short-term volatility and remain invested in the markets proves to be the prudent, most rewarding strategy time and time again when considering established, highly experienced asset management houses with proven track records,” he says.
Many investors don’t have a long-term view on their investments and use investment platforms to switch funds whenever there is market volatility, Maharajh says.