File image: Pexels
File image: Pexels
File image: IOL
File image: IOL

This article was first published in the second quarter 2017 edition of Personal Finance magazine.

JOHANNESBURG - The South African equity market has delivered below-average returns over the past three years, and by now you may be tempted to capitulate and take a different direction with your investment portfolio. 

You may be contemplating switching managers, shortening your time horizon, changing your investment strategy, or reducing your equity exposure … all arguably precisely the wrong decisions to make in a challenging market, according to Coronation Fund Managers. In fact, these actions are exactly the opposite of what the rational, long-term investor should consider in the current environment, the company says.

“The local share market has failed to beat inflation for two consecutive calendar years, and for only the second time in the past two decades. While this disappointing short-term outcome may make it more difficult to stay the course, especially for newer investors who made their initial investment relatively recently, commitment to your chosen investment strategy remains the best way to optimise outcomes over the long term,” says Karl Leinberger, the chief investment officer at Coronation.

According to Leinberger, the following actions can help you achieve better returns: 

Lengthen your time horizon and maintain appropriate growth asset exposure

“Studies show that investors give too much weight to recent returns, particularly if they are negative, and not enough to the long-term outcomes that are better aligned to their needs. This mental short-cut can end up costing you a lot of money. It is the return over the lifetime of an investment that really matters.”

Leinberger refers to the returns of three Coronation funds with long-term growth objectives to prove his point (see table). “Based solely on these funds’ 2016 performances, you might conclude that it would be better to reduce risk. However, a more accurate picture of expected outcomes for the different risk profiles are the returns produced over the past five years.” He says it is also worth pointing out how quickly the short-term numbers can change. Returns for the 12 months to the end of January 2017 are markedly different to the returns recorded for the previous 12-month period to the end of December 2016. And weaker historical returns increase the likelihood of stronger future returns.  

Invest actively in a low-return environment

According to Leinberger, Coronation strongly believes that skill becomes more valuable, not less, in challenging markets.

“While investors may be tempted to switch to cheaper (passive) options during challenging times, we would argue that it is in declining markets that the truly active managers differentiate themselves,” he says. In a high-return environment, when the markets are returning, for example, 15 percent a year, the manager who outperforms an already compelling return by three percent a year becomes a “nice to have”. When markets are delivering eight to nine percent a year, investing with a manager who can add an additional three percent a year to your total investment return will transform your retirement, he says.

File image: IOL

Harness the power of active asset allocation 

Asset allocation is the most important investment decision you make, Leinberger says. “It dwarfs what any fund manager can achieve purely from security selection.” 

He argues that the value added by active asset allocation becomes more important, not less, during tough times. “Investors typically invest after returns have been good, and then sell out after returns have been bad,” he says, whereas good asset allocation requires you to do the opposite. “You tend to achieve better results when you sell after a period of above-average returns, when prices have gone up, and buy after a period of below-average returns, when prices have fallen.” 

Leinberger believes the majority of investors are better off investing in a multi-asset fund offered by a skilled manager with a strong track record in asset allocation decision-making. “By giving your manager a bigger toolbox with which to create value, you can achieve a much better return at reduced levels of risk.” 

In building their multi-asset funds, he says Coronation aims to achieve anti-fragile, robust portfolios that can handle the future playing out differently from what we expect. “We diversify across sectors, industries, regions and currencies, and don’t allow an entire portfolio to hinge on a single view, no matter how much we believe in that view.” 

Stay on track

“While long-term investing delivers compelling results – and intuitively makes sense – living it is tough, and you are likely to navigate several periods of poor short-term performance,” Leinberger says.  As long as you own a fund with an investment goal, time horizon and risk budget that meets your needs, it makes sense to stay the course in your existing investment, he concludes.