Stick to your guns
Consistent investment strategy breeds rewards
WITH PANIC GRIPPING financial markets worldwide, now isn’t the time for retail investors to be deviating from their long-term investment strategies or taking their money out of the hands of professionals. That’s the opinion of Trevor Abramowitz, of Alexander Forbes, who says professional and retail investors alike who deviate from a sound long-term strategy will end up doing themselves more harm than good.
For this reason he believes investors will enjoy a competitive advantage by buying into unit trusts managed by experienced investment teams.
Abramowitz says retail investors need to be wary of trying the “do-it-yourself” approach to investing, which has received a lot of coverage following the fallout from the financial market crisis. “Investors who try and manage their investments for themselves may end up becoming overconfident in their own abilities,” says Abramowitz, adding that will see those chasing greater short-term returns. Instead, he argues now’s the time when investors will score from backing managers who have clear investment strategies.
Last week, global stock markets slumped on the back of concerns the European Union would be unable to gather sufficient support for its bailout package for Greece. That meant default risks could spread to Italy, Portugal and Spain and which resulted in many institutional and retail investors pulling their money out of the market. Markets were moving between 3% and 5%/day. Such wild swings will invariably concern inexperienced investors, who remain nervous after watching the markets slump in 2008/2009.
However, unit trusts have statistically remained a good way to see out market volatility, says Nick Brummer, a director at unit trust platform Investonline.co.za. Brummer says: “Equity markets have shown impressive results over the past five years. The two top performing funds have achieved 211% and 180% respectively over the past five years, which has helped to boost investor confidence in domestic markets.
“This strong performance helps explain why unit trusts have gained so much in popularity. Even over the past year – when there were huge levels of volatility in the stock market – unit trusts have continued to deliver strong returns, with top performers delivering a return of as much as 70%.”
Brummer says a key part of generating superior returns is to invest in fund managers who have tested investment processes and a proven track record and to be able to find low-cost platforms for retail investors to invest in.
There are few asset managers in SA who better encapsulate the concept of sticking to a tried and tested investment formula than Allan Gray. As the graph shows, R10 000 invested in 1974 would now be worth R76m with dividends reinvested. However, as the graph also shows, much of Allan Gray’s success only came after a very average decade in the Eighties. There’s a lesson in that for investors who want to chase the herd in making short-term investment decisions rather than sticking to a simple long-term strategy.
Perhaps what the Allan Gray graph best depicts is the value of compounding returns and “sticking to your guns”. Despite multiple equity market crises – including the tech bubble, the Asian crisis and the sell-off in 2008 – an investor who has stuck with a manager with a clear investment mandate will have enjoyed some excellent returns.