Understanding the risks you have taken with your investments is the key to understanding the returns of the past quarter and putting them into perspective.
Looking at the average returns of all the unit trust sectors reinforces how investors who invest in equity funds and multi-asset funds with high exposure to equities need to have a longer investment horizon and to be able to stomach some short-term losses.
Investors in more conservative funds have largely been spared these losses. The multi-asset low-equity funds, for example, achieved a positive, albeit low, return over the past quarter (0.87 percent), but their average return over the past year (7.04 percent) was above that of the slightly more risky funds in the high-equity multi-asset sub-category (6.34 percent).
Over the longer-term, however, investors in more conservative funds typically give up some returns they could earn in order to avoid shorter-term losses.
The five-year average returns prove this case. Low-equity multi-asset funds have earned, on average, 9.59 percent a year over the past five years, while the high-equity multi-asset funds earned 11.88 percent.
Ben Jooste, the head of retail investments at Investment Solutions, says you should
remember that a loss over the shorter term will be a loss only if you sell out. If you wait for your investment to recover, the loss may well turn into a gain.
Even if you are comfortable that you are investing for the long term and are prepared to ride out the volatility that comes with investing in a pure equity fund or the less bumpy, but still at times volatile high-equity balanced fund, remember that investing with a manager who follows a particular style can also expose you to investment risk. That risk may pay off, but may also expose you to long periods of under-performance.
Jooste says no investment style can consistently outperform the market, and you cannot determine which styles will outperform when. Given that the value style has under-performed for so long, it is likely to perform better in future, he says.
It is difficult for ordinary investors to research investment styles, but advisers or multi-managers who research managers can assist you to understand and choose the right manager for your investment goals, or to blend managers for smoother investment returns, Jooste says.
Smaller managers are able to show more style diversification, while managers with large amounts to manage may struggle to follow a style because they cannot take large enough stakes in the required shares, he says.
Also, while all managers should be invested in good quality shares with good cash flows and dividends, when these shares become expensive some managers will not invest in them, he says.
Nadir Thokan, an investment analyst at multi-manager 27Four, says value shares did recover a little in October.
He says investors exposed to value-style managers should aggressively question whether their managers are truly value fund managers or are just picking shares that are cheap relative to the book value of the company.
Staying invested in the likes of resources shares, where future profits are uncertain and subject to very low commodity prices is questionable, Thokan says. Instead, managers should be looking for businesses that are experiencing a short-term earnings blip that is likely to correct soon.