Victoria Reuvers. SUPPLIED
Victoria Reuvers. SUPPLIED

OPINION: Chasing past performance won't pay off

By Victoria Reuvers Time of article published Aug 7, 2019

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For several years now South African investors have received little reward for taking risk - particularly those invested in South African equities and/or listed property companies.

Those invested in low or high equity (regulation 28 compliant, pre-retirement capital) funds and portfolios haven’t been much better off due to disappointing returns over the past five years. These returns can be attributed to a range of factors, with limits on offshore allocations combined with disappointing local equity returns at the fore.

The poor returns have introduced a far higher rate of churning between investments than in previous years. It’s human nature - in times of low returns, investors look at previous winners and switch their investment to include these performers, hoping for the same outcome as in the past.

To quote the legendary Warren Buffet: “The investor of today does not profit from yesterday’s growth”.

As much as we are warned that past performance is no guide to the future results, many investors still switch to the latest hot offerings just before the inevitable slump in performance.

Morningstar recently conducted research into the area of investor returns and created a hypothetical “Performance Chaser” portfolio. In this portfolio investors switch their investments into the best performing fund from the previous year at the start of each calendar year. This is then compared with two portfolios managed by Morningstar - the Morningstar SA Multi-Asset Low Equity and SA Multi-Asset High Equity portfolios.

The research aims to illustrate, by means of comparison, the returns achieved by the performance chasers versus the returns achieved by investors that remained invested in their respective portfolios over the same time frame. The difference in the returns was astonishing.

The Morningstar low equity portfolio returned 6.3percent more than the Performance Chaser portfolio over a period of four years. In other words, an investor with an investment of R1million that stayed the course (and remained invested in the Morningstar low equity portfolio) would have gained an extra R63095 in returns.

The difference is even more pronounced in the high equity portfolio. In this case, the Morningstar Adventurous portfolio returned 13.93percent more than the Performance Chaser portfolio over a period of four years. In other words, an investor with an investment of R1m that stayed the course would have gained an extra R139269 in returns.

The above scenario highlights the benefits of staying invested in a robust and consistent strategy as opposed to backtracking and chasing yesterday’s winners.

Let us examine the possible reasons for the underperformance of yesterday’s winners:

The selected funds’ good ideas have all paid off and the returns have been realised. They may have had an aggressive view that played out in their favour.

The bottom line: investing is a marathon, not a sprint. If you have a five-year investment horizon, remember to keep a long-term view - don’t worry too much about your returns for the first three to five years. When it comes to investing, patience is rewarded.

Victoria Reuvers is a director and senior portfolio manager at Morningstar Investment Management South Africa.


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