Long-term investing in growth assets provides the best returns

By Martin Hesse Time of article published Apr 8, 2019

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The past few years have been gruelling ones for South African unit trust investors, and you may have become disillusioned with the equity market in particular, which last year delivered the worst results since the 2008 financial crisis. You may take comfort, then, in Old Mutual Investment Group’s latest Long-term Perspectives report, which provides reassurance that things are not as bad as they might seem and may even be looking up.

The annual report has consistently shown, since its inception in 2014, that long-term investing in growth assets, particularly equities, provides the best inflation-beating returns.

Its aim is to filter out the noise for investors, which often results in bad investment decisions, by plotting the returns of different asset classes over many years and comparing them with the returns of the MacroSolutions Balanced Index, which represents a typical South African balanced fund.

Some important take-outs for investors from this year’s Long-term Perspectives report are:

  • The poor returns from equities over the past few years and 2018 in particular have brought returns back, more or less, to the long-term average. So although you may be disappointed in the recent performance of your investment, you may also have enjoyed the above-average performance in the years immediately following the 2008 financial crisis. Unfortunately, many investors came to believe this above-average performance was the norm, says a member of the team responsible for the report, Graham Tucker, portfolio manager of MacroSolutions balanced funds. He says five years ago, the equity market was far too high. “One of the reasons for starting Long-term Perspectives was to put these high returns in perspective for investor,” he said at the recent launch of this year's report.
  • While globally equities are still considered overvalued, value is starting to return in the local equity market, presenting buying opportunities.
  • Diversification offered by a balanced fund “smooths out” the investment ride while delivering almost the same long-term returns as a pure equity portfolio.

Looking at the main asset classes in turn, as at December 31, 2018:


Although volatile, the local equity market has shown a strong upward trend throughout most of the 20th century and into the 21st century. As one can see from the graph, the market has essentially returned to its long-term average after being one standard deviation above average in 2014 (a standard deviation is a statistical measure of how far a datapoint deviates from the mean). Since 1925, the South African equity market has delivered real (after-inflation) returns of 7.9%.

The more expensive the market (the higher the share prices relative to company profits), the lower the subsequent five-year return and vice versa, the report points out. The price-to-earnings ratio of the JSE fell in 2018, which “means that some value has returned to the market and we would expect slightly better real returns going forward”. The report forecasts real returns to average 5.5%.

Listed property

Following difficult conditions in the 1980s and 1990s (real returns averaging -7.8%), the report says, property values soared in the 2000s, with the years 2006 to 2017 delivering 10.1% real returns a year. However, “tepid economic growth and company-specific governance problems have recently put downward pressure on the sector”.

In 2018, listed property declined by 28.5% in real terms. Overall, since 1980, listed property has delivered 3.8% real annual growth. The MacroSolutions team expects real returns over the next five years to average a higher 6.5%.


Returns from South African bonds since 1925 can essentially be divided into three periods: a bull market from 1925 to 1947 (average real return 4.5% a year), a four-decade bear market from 1947 to 1986 (-2.3% real), and a sharply rising bull market from 1986 until now (5.3% real).

The strongest growth was between 1995 and 2009, when bonds returned 7.7% a year, on average, in real terms. However, growth slowed to 3.2% subsequently, reflecting both local and global political and economic troubles.

Looking forward, the report says bonds appear to be at an inflection point. “New political leadership appears to be ushering in an era of improved governance,” it says, “... and this should underpin financial stabilisation, leading to slightly higher returns (4% real, on average) over the next five years.


Over the past five years, cash has outperformed equities in South Africa, the report says. However, since 1925, cash has, essentially, barely outperformed inflation: nominally it has delivered 6.7%, on average. With inflation over the period averaging 5.8%, the real return from cash has been a low 0.9%. The report says it should average 2% real over the next five years.

Global markets

Since 1925, global equities have delivered average inflation-adjusted returns of 5.6% in US dollars and 7.6% in rands, showing a similar upward trend to the South African market.

Global bonds, on the other hand, have shown little correlation to global equities (28% correlated), and effectively zero correlation with South African equities. Since the 2008 crisis, global bond yields have been extremely low and prices high.

Looking forward (as at December 31, 2018), the report expects global equity returns to be slightly lower than the local equity market, returning 5% (real) in US dollars, and global bonds to deliver a negative 0.5% (real) in US dollars.

The rand

The rand-US dollar exchange rate is driven over the long term by the difference in the inflation rates between South Africa and the US, though over the short-term it can deviate significantly.

“The rand has many influencing forces, of which inflation and global conditions remain the dominant ones. While local economic and political considerations are important too, they typically tend to blunt or accentuate the driving forces coming from abroad,” the report says.

A slower US economy, coupled with greater stability politically here in South Africa, should see a stronger rand over the short term, the report says, but “over the medium to longer term, the rand will continue on a weakening path, as South African inflation will remain higher than that of the US”.


The index was initially a simple allocation of equity (65%), bonds (25%) and cash (10%). However, the Long-Term Perspectives Report states that, over time, the composition of the index has been adjusted to reflect changes in the investable universe and the regulatory environment. The index is currently composed as follows:

  • SA equity: 42.5%
  • Global equity: 22.5%
  • SA bonds: 20%
  • Global bonds: 7.5%
  • SA cash: 5%
  • Gold: 2.5%

Since 1929 the index has averaged a return of 12.1%. The real (after-inflation) return for investors has been 5.7%.


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