Be patient for a return when you invest in equities – a seven-year wait is quite short
By David Crosoer and Prieur du Plessis
JOHANNESBURG – Seven years sounds almost biblical in terms of waiting for a decent return, and almost no unit trust in SA has a longer-term time horizon, but in relation to what can happen to equities, as well the time many of us may need to save, it is relatively short.
The past seven years have produced sub-par inflation-beating returns, and the past five years barely positive returns. Is this likely to change anytime soon?
The chart on the right shows the annualised rolling seven-year returns from both SA and foreign equities in rand over a 60-year period, and excludes dividends (which would increase the return from holding equities) and inflation (which would reduce the return by at least an equivalent amount).
What does the chart tell us?
First, there have been periods in the past where South African equities, and also foreign equities, have performed poorly over seven-year periods when measured in rand, although we'd need to go back to the early 2000s and late 1970s in SA to see similarly subdued seven-year returns.
Second, at least since the 1990s, it does appear that local equities and foreign equities have performed well at different times. For example the recent weakness of South African equities has corresponded with a period where foreign equities have performed strongly, while in the build-up to the Global Financial Crisis in 2008 it was the opposite. Does this tell us anything about what could happen in the next seven years?
Unfortunately not. The next seven years could be a period in which SA equities outperform foreign equities, much like in the late 2000s, with a return to above-average global growth. Or, equally plausible, it could be a period in which foreign equities continue to outperform (ie SA continues to disappoint), or even a period (more worryingly) in which both SA and foreign equities will perform poorly, like for much of the 1970s. How then should investors think about their equity exposure and what lessons, if any, could they draw from the longer-term returns?
The most important point we'd make is that both SA and foreign equities have delivered returns well in excess of inflation in the long term, but that long term can be much longer than seven years or the investment horizon to which many investors are accustomed.
The second point is that the less diversified the exposure, the longer investors may need to commit to realise their expected gains. The chart indicates that SA and foreign equities can offset each other to some extent; investors who elect to favour one over the other should tolerate less consistent performance.
The third point is that it can be very dangerous to chase performance and move from SA to foreign equities (or vice versa) at the worst possible time. Investors who got their timing wrong (eg switched to foreign equities in 2000, or SA equities in 2008) would have destroyed considerable value.
South Africans can invest in unit trusts that invest only in SA equities, or unit trusts that invest only in foreign equities, or unit trusts that invest in a combination of both, or even unit trusts that don’t have to invest in equities all the time. We can also invest in more than one unit trust.
One option for SA investors without a strong conviction is to simply split the allocation 50:50 between SA and foreign equities. In portfolios where we have complete discretion, but a South African mandate, this tends to be our starting point. Today, these portfolios remain overweight foreign equities relative to SA equities.
Regardless of how you choose to invest in equities, it is important to accept that seven years is not that long when it comes to what can happen to the equity market, and it’s certainly not long in terms of the time frame most of us have over our investable lifetime. For many of us equities remain the most reliable way of accumulating wealth over the long term, and we should be especially cognisant of that in periods where their returns disappoint.
David Crosoer and Professor Prieur du Plessis are chief investment officer of PPS Investments and chairperson of PPS Multi-Managers respectively. email: [email protected]