Feb 12, 2020
The current challenge facing many long-term investors is to simply survive the shorter-term market disappointments to benefit from the return premium offered by growth assets over the longer term.
For many investors, the last five years have been traumatic. Domestic woes and instability in global markets have resulted in muted returns across almost all asset classes.
Figure 1: A range of factors have led to disappointing returns
Source: Ninety One SA (Pty) Ltd.
While global assets have outperformed local assets, this outperformance is mostly due to rand depreciation, as evidenced in Figure 2. Over the five years to the end of December 2019, the rand has depreciated by as much as 4% per annum against the US dollar, thereby making up the bulk of the rand return for global cash and bonds and a sizable portion of the return for global equities.
Figure 2: Five-year annualised returns in rands to 31 December 2019
Source: Morningstar and Ninety One SA (Pty) Ltd, 31.12.19. The sector returns are NAV based, inclusive of all annual management fees but excluding any initial charges, gross income reinvested.
A lack of retirement savings and depressed investment markets have left many pensioners anxious about the future. Jaco van Tonder, Advisor Services Director, has explored the challenges facing retirees as part of Ninety One’s in-house research study into “How investors should approach living annuities”.
Jaco makes the point that even though the principle of “beating inflation requires exposure to equities” is widely accepted by investment professionals, it is easy to overlook this principle in situations where an investment portfolio is required to produce an income. Jaco also makes two conclusions that are relevant to this article:
Despondent investors have increasingly sought refuge in fixed income investments, thereby potentially compromising their long-term investment goals. This behaviour is even true for conservative investors who had previously invested in multi-asset low equity funds (i.e. lower risk funds that target inflation-beating returns over rolling three-plus years), such as the Cautious Managed Fund.
For long-term investors, however, investing in the wrong asset class can prove costly. The South African Savings Institute (SASI) makes the point that while in the short term cash and bonds may be somewhat safer, in the longer term they provide less protection against inflation and therefore are unlikely to maintain real buying power. Furthermore, tax considerations generally accentuate this outcome. SASI’s analysis suggests that over time, the four domestic asset classes are likely to produce the following real (after inflation) returns in the long run:1
It is also important to note that with inflation well within the target range and developed market interest rates at all-time lows, interest rates in South Africa are likely to trend downwards. The attractive real returns offered by money market and other flexible fixed income investments are therefore likely to come under pressure as a result. At the same time, we are now far more optimistic on the prospects for growth assets to deliver inflation-beating returns in the future.
We therefore continue to argue that conservative investors should reconsider the important role that multi-asset low equity funds can play in their portfolio. These funds offer a bias to income-generating assets, while maintaining a growth element.
The Cautious Managed Fund, for example, is suitable for conservative investors saving for retirement and for retirees drawing an income from a living annuity. The fund is well-positioned to meet these needs, thanks to its broad investment opportunity set that allows for investment in assets that offer growth and income, and a strong emphasis on capital preservation. As a result, the Cautious Managed Fund has delivered a positive real return over rolling three-year periods 81% of the time, as shown in Figure 3.
Figure 3: Growing investor capital in real terms
Source: Morningstar and Ninety One SA (Pty) Ltd, as at 31.12.19, NAV-based, net of fees, with gross income reinvested. Highest and lowest annualised return since inception (12-months rolling): Feb 2010: 23.8% and Feb 2009: -6.8%, respectively. Fund inception date: 01.04.06.
A key strength of the fund is its ability to exploit the changing investment opportunity set. Historically, multi-asset funds have looked to South African equities as the primary driver of real returns and offshore bonds as the uncorrelated defensive asset. However, we believe that offshore equities are now the best opportunity for growth, with South African bonds offering attractive risk-adjusted returns, aswell as helping to counterbalance risk in the portfolio.
This view is reflected in the next two charts. Figure 4 shows the changing asset allocation of the Cautious Managed Fund over time, while Figure 5 depicts the Quality capability’s range of expected returns over the next five years from the different assets held in our Quality portfolios, including the Cautious Managed Fund.
Figure 4: Cautious Managed Fund asset allocation since 2006
Source: Quality capability, as at 31.12.19.
Figure 5: Range of expected annualised returns for current Cautious Managed Fund holdings (in rands)
Source: Quality capability, as at 31.12.19.
In today’s uncertain investment environment, asset allocation and stock selection are key. Conservative investors should consider entrusting a portion of their investments to the experienced, well-resourced and globally integrated portfolio management team who manages the Cautious Managed Fund. To quote, Duane Cable, Cautious Managed Fund Portfolio Manager: “In the volatile world in which we find ourselves, it has become increasingly apparent that one needs to have a global perspective to navigate the choppy waters of investment markets”.
1South African Savings Institute.