Invest across asset classes

Old Mutual’s long-term data shows that equities were the bestperforming asset class on average since 1929, but there were individual years in which equities were not the best performer – in fact, investors lost money.

In total, for 86 years from 1930, South African equities was the topperforming asset class 47 percent of the time, bonds 14 percent of the time and cash 13 percent of the time.

To balance the good returns with the bad and enjoy less volatile returns, you need to diversify across the asset classes.

The data shows that different asset classes can go through long periods of negative returns.

Over the 92 years from December 1924 to December 2016, the worst drawdown – fall from peak to trough in equities (as measured by the FTSE/JSE All Share Index) was minus 63.2 percent – a loss incurred over two-and-a-half years, Longterm Perspectives shows.

It also reveals that the longest bear market in equities lasted five years, during which time investors who bought at the peak of the market lost 55 percent of their investment. When the bear market ended, it took 15 years for those investors to break-even.

The South African bond market had 39 bad years from 1947, during which time investors lost 60.8 percent of the value of their investment in real (after-inflation) terms.

Listed property had a period of deeply negative returns between 1983 and 1998, when investors’ real returns were minus 7.8 percent.

However, by blending different asset classes, such as equities and bonds, it is possible to reduce the drawdowns, or negative periods.

A simple 50:50 mix of equities and bonds reduces drawdowns in your portfolio significantly – in such portfolio, the worst drawdown over the past 92 years was 45.2 percent, Long-term Perspectives shows.

Introducing other assets classes, such as global equities and gold, can further diversify your returns.

Long-term Perspectives reports that, over the past 90 years, global equities have delivered real returns of 5.4 percent in United States dollars and 7.2 percent in rands – a lower return than local equities.

However, global equities are a powerful source of diversification and risk reduction, Old Mutual says. Global equities’ top position among the assets classes on average returns for the past five years is proof of this. Global equities returned on average 23.4 percent a year relative to South African equities’ 13 percent a year, the report shows.

In order to help you to realise the benefits of diversifying across asset classes, Old Mutual has constructed an asset allocation index, the MacroSolutions Balanced Index. This index is made up of:

• 45 percent South African equities; • 20 percent global equities; • 20 percent South African bonds; • Five percent global bonds; • 7.5 percent South African cash; and • 2.5 percent gold. This index has, over the 87 years since 1929, earned a real return of 5.7 percent a year.

One rand invested in 1929 and earning the same return as the inflation rate would have grown to R191 at the end of 2016, but R1 invested in the MacroSolutions Balanced Index would have grown to R23 602 in nominal terms. This represents an increase of 123 percent in real terms, Long-term Perspectives says. An investment in local equities would have increased 472 percent in real terms and in global equities 296 percent. Cash would have increased only two percent in real terms.

“Diversification is the one free lunch in investments; use it. That is because it pays to invest across different asset classes,” Long-term Perspectives says.