Be care­ful of chas­ing win­ning in­vest­ments

Pretoria News Weekend - - OPINION -

THE STORY of the duck and the scor­pion il­lus­trates how we tend to act in a cer­tain way, even if it’s not in our best in­ter­est.

The duck hes­i­tantly of­fered to help the scor­pion to safety af­ter he was stranded in a flood. Shortly be­fore reach­ing the shore, how­ever, the scor­pion stung the duck, which even­tu­ally led to the death of both of them. Al­though the scor­pion knew that his ac­tions would kill them both, he found it too dif­fi­cult not to give in to his nat­u­ral in­stincts.

In­vest­ment fig­ures pub­lished monthly for both shares and unit trust funds can place in­vestors in the scor­pion’s po­si­tion. It’s in our na­ture to want to choose last year’s win­ners for our fu­ture port­fo­lio, but, his­tor­i­cally, it’s been proved that this could land you in very deep waters.

Let’s use lo­cal unit trusts as an ex­am­ple. In­vestors can limit their re­search to funds that per­formed the best in the pre­vi­ous year, but, in my opin­ion, this ap­proach may be more poi­sonous than the scor­pion’s sting.

If you in­vested in last year’s five best-per­form­ing South African eq­uity gen­eral funds, your in­vest­ment would have grown by an av­er­age of 33.37%, whereas the sec­tor on av­er­age re­turned just more than 3% over the same pe­riod and the FTSE/ JSE All Share In­dex grew by a mere 2.6%.

Most of the top five funds were, in the main, ex­posed to re­source-based shares, but the re­turn shows that it was pos­si­ble to achieve ex­cel­lent growth for those who were will­ing to take the risk in a rel­a­tively dif­fi­cult in­vest­ment en­vi­ron­ment.

The five weak­est-per­form­ing funds would have treated you much worse: you would have lost more than 10% of your cap­i­tal.

True to their na­ture, at the be­gin­ning of this year most in­vestors would have cho­sen the five best-per­form­ing funds of the pre­vi­ous year, sim­ply be­cause these funds de­liv­ered amazing re­turns in 2016.

Un­for­tu­nately, man­ag­ing risk and in­vest­ments isn’t quite that sim­ple, be­cause, to Oc­to­ber 17 this year, the top five per­form­ers of 2016 would not have pro­vided you with even half the re­turns of the eq­uity gen­eral sub-cat­e­gory, or the JSE’s re­turns.

An even more in­ter­est­ing fact emerges when you look at the five worst-per­form­ing funds of 2016. Not only have these five funds so far per­formed bet­ter over the same pe­riod, but they have also de­liv­ered dou­ble the re­turns of the five best-per­form­ing funds.

I don’t rec­om­mend that you choose the five worst-per­form­ing unit trust funds (or shares) for your port­fo­lio each year. I also don’t rec­om­mend that you limit your choices to the funds that did well in the past.

Al­ways take the fol­low­ing cri­te­ria into ac­count when choos­ing funds: the un­der­ly­ing costs; the qual­ity and his­tory of the man­age­ment team; the fund man­agers’ abil­ity to de­liver con­stant (not lim­ited to a oneyear pe­riod) above-av­er­age riskad­justed re­turns; and the size (in rand value) of the un­der­ly­ing funds. These four fac­tors are far more im­por­tant in­vest­ment aids than bas­ing your choice on how funds per­formed in the past.

When it comes to choos­ing funds, it is al­ways ad­vis­able to con­sult an in­vest­ment pro­fes­sional to en­sure that your nat­u­ral in­stincts don’t get the bet­ter of you, leav­ing you to drown, be­cause you ended up at the wrong end of the scor­pion’s sting. Schalk Louw is a port­fo­lio man­ager at PSG Wealth Old Oak.

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