After 3 years of difficult market conditions, investors would be forgiven for feeling despondent. But is this assumption about their state of mind, correct?
To determine their psychological state raises an additional question: how do we define happiness? There have been many studies undertaken, but the widely accepted formula is that happiness is equal to reality minus expectations. People are generally happy when the reality of their life is better than anticipated. Unreasonably high expectations are often a recipe for disappointment. This same formula can be loosely applied to the evaluation of investment outcomes.
Now consider that we know that the pain of a R1000 investment loss far outweighs the pleasure of a R1000 investment gain. So, in considering the reality component of the equation, investors may well be feeling unhappy when they peruse their quarterly investment statements. However, rather than be obsessed with (and disappointed by) short-term performance, investors should remember that their true investment reality is determined by their investment time horizon. Data from the Ninety One Investment Platform may surprise them – the average holding period for local discretionary investments is 8-10 years, while the average holding period for discretionary offshore investments is in the region of 20-25 years!
The unintended consequence of this short-term focus on performance is that investors unwittingly tend to be too risk averse, particularly with their long-term investments. Even in the case of income investments, our data shows that the average holding period for money market funds is greater than 12 months. The sad reality is that investors are not letting their money work hard enough for them.
Turning to expectations, many people still have this notion that one or two big investment ideas will make them massive returns over the short term. They lose sight of the fact that they should take a holistic view of their investment portfolio over the next 10-20 years. Often, buying into ‘the next big thing’ leads to crushing disappointment and much unhappiness!
A variety of global factors weighed on sentiment over the first quarter, which included rising tension between China and Taiwan, fears about the sustainability of the banking sector and extreme bond market volatility. The meteoric rise of AI and ChatGPT also grabbed the headlines. On the local front, greylisting and load-shedding dominated the news. These concerns have fuelled investor fears about the immediate future, again causing them to lose sight of their long-term investment goals.
Challenging markets have translated into investor flows slowing dramatically, as shown in the ASISA1 net flows into collective investment schemes for 2022. The total net flows for the year (excluding money market funds) were approximately R12 billion. During the bull markets of 2009 and 2014, net flows totalled more than R100 billion per annum!
The big question then is where this money went instead. Household bank deposits are sitting at R1.63 trillion, mostly held for far longer than is appropriate for short-term cash investments. This means that investors are not maximising the return potential of their conservative cash holdings. Be sure to read Paul Hutchinson’s argument for an alternative to ‘lazy’ money, which along with the 12-month fee reduction we have introduced for the Ninety One Diversified Income Fund, should help you convince your clients to make their money work harder for them.
But back to reality. Easy as it is to feel despondent about news headlines, the 12-month performance numbers have come through quite strongly, particularly in our Quality range, in which many clients are invested. Over the year to end March, the Ninety One Opportunity Fund returned close to 12%, beating peers by almost 7%. This is not far off the stellar 20-year track record of the Fund which generated a return of more than 13% per annum (8% per annum after inflation).2
Interestingly, the FTSE/JSE All Share Index delivered 24% per annum over the 3 years to the end of March. However, this performance includes the post-Covid recovery but excludes the big drawdown during the pandemic crisis. Many investors, however, may have missed the uptick because they sold out when markets collapsed. Even including the Covid period, 5-year returns for SA equities are at a respectable 10.4% per annum, comfortably above cash.
I want to conclude by reminding you that you should not lose sight of the investment value you add to your clients’ portfolios over time, especially during tough periods when returns are lower than expected. We conducted research to consider this contribution and tracked the value-add across two axes. Firstly, advisors must ensure that their clients invest according to their risk profile. Most investors have a lower risk tolerance than they should have, given their investment time horizon. The difference between a low-risk and a high-risk portfolio can vary anywhere between 4 and 6% per annum, so the quantum of relative out- or underperformance can be staggering over time. The second axis of value lies in the funds you choose for your client based on their risk profile, where again, fund performance can vary between 4 and 6% per annum. So as an advisor, you should be comforted by the fact that your value-add could be more than 8% a year for your clients, provided you have correctly analysed their risk profile and chosen the correct fund mix according to their risk profile.
In summary, do not underestimate how much you contribute to your clients’ happiness, either by making sure that their reality improves through the investment outcomes they receive or by correctly managing their expectations.
Happy investing!
Sangeeth Sewnath
Deputy Managing Director
1 Association of Savings and Investment South Africa.
2 Source: Morningstar, dates to 31 March 2023. Performance figures are calculated NAV-NAV, net of fees, in rands, A class. For more information, visit the Ninety One Opportunity Fund page on our website.
