Long-term in­vest­ment doesn’t need knee-jerk ad­just­ing

The Star Early Edition - - OPINION & ANALYSIS - Pi­eter Koeke­moer

IN TIMES of stress, the hu­man im­pulse is to take ac­tion. When the econ­omy and in­vest­ment re­turns start to sink, this in­stinct could drive in­vestors to do some­thing – any­thing – just for the sake of tak­ing ac­tion. This is pre­cisely the wrong re­ac­tion in chal­leng­ing times.

There are many knee-jerk short-term re­sponses, all of which will ul­ti­mately de­tract from long-term in­vest­ment re­turns.

Cut ex­po­sure to risk as­sets

When the in­vest­ment out­look and sen­ti­ment are poor, stressed in­vestors of­ten lose their tol­er­ance for volatil­ity. Our eq­uity mar­ket has now de­liv­ered a pal­try an­nual re­turn of 3 per­cent over the past three years. Lo­cal savers are not ac­cus­tomed to so many years of anaemic, low-volatil­ity re­turns. As a re­sult, it ap­pears that many in­vestors are aban­don­ing eq­ui­ties in favour of the yield­ing as­set classes that have out­per­formed over this pe­riod.

In con­trast, we be­lieve that fixed-rate bonds are over­val­ued, and that se­lect eq­ui­ties of­fer more value than at any other time in the past five years.

It is cru­cial that in­vestors main­tain ap­pro­pri­ate ex­po­sure to growth as­sets, which are the only in­vest­ments that will pro­vide the real long-term growth in­vestors re­quire. De­spite the de­pressed con­di­tions, in­vest­ment op­por­tu­ni­ties are still on of­fer. Even in a slow-growth en­vi­ron­ment, great man­age­ment teams can grow prof­its: ei­ther by gain­ing mar­ket share, ex­pand­ing into other mar­kets, ex­ploit­ing new tech­nolo­gies or con­tain­ing costs.

In­vestors should only make changes to their port­fo­lio if their needs have changed, not in re­sponse to re­cent mar­ket move­ments or per­for­mance ex­pe­ri­ence.

Shorten time hori­zon

The temp­ta­tion is to shorten your in­vest­ment hori­zon – in­stead, it should be length­ened. Iden­tify long-term win­ning man­agers and as­set classes, and back them for the long run. Don’t fid­get or lose faith at pre­cisely the wrong time. Stay­ing the course has his­tor­i­cally been the right choice, with strong per­for­mance re­cov­er­ies af­ter dis­ap­point­ing pe­ri­ods for lo­cal eq­ui­ties in 1997-1998, 2000, 2002, 2007-2008 and 2011.

Switch to cheaper prod­ucts

In a low-re­turn en­vi­ron­ment, in­vestors typ­i­cally con­sider cheaper man­agers or pas­sive prod­ucts to save on fees. How­ever, this is pre­cisely the time that out­per­form­ing the mar­ket be­comes even more im­por­tant. In a high-re­turn en­vi­ron­ment, al­pha is nice to have.

When the mar­ket de­liv­ers 15 per­cent, it’s nice to achieve an out­per­for­mance of 2 per­cent or 3 per­cent. But in a low-re­turn en­vi­ron­ment, out­per­for­mance re­ally starts to mat­ter.

Out­per­for­mance of 2 per­cent to 3 per­cent on a base of 9 per­cent is a must-have: The dif­fer­ence be­tween 9 per­cent and 12 per­cent, com­pounded over years, can trans­form your re­tire­ment. Skill in de­liv­er­ing strong out­per­for­mance be­comes more valu­able (not less) in chal­leng­ing times. In­vest­ing with man­agers that have a demon­stra­ble track-record of suc­cess­ful as­set al­lo­ca­tion will be­come even more im­por­tant.

In a low-re­turn en­vi­ron­ment, re­tirees should be very care­ful how much money they with­draw from their pen­sions. The gains from re­duc­ing an­nual draw­downs is non-lin­ear. A small re­duc­tion in the draw­down rate can add years of ad­di­tional re­tire­ment in­come. It is also im­por­tant to un­der­stand the place of un­der­writ­ten an­nu­ities in your re­tire­ment plan.

A suit­able prod­uct

In times of low re­turns, it is tempt­ing to buy an un­der­writ­ten an­nu­ity. But in­vestors should be sure that the prod­uct is suit­able to their needs. Be very care­ful of an­nu­ities that es­ca­late by a rate below in­fla­tion.

Cur­rently, a 65-year-old in­vestor typ­i­cally gets a 4.7 per­cent yield in an un­der­writ­ten an­nu­ity, which es­ca­lates at 5 per­cent a year. This may feel like a low-risk op­tion, but in fact it is ac­tu­ally a propo­si­tion that holds a lot of risk.

Over a 30-year time hori­zon, the power of com­pound­ing will not be on your side. In 30 years, some­thing that costs R1 to­day will cost R4.30 at 5 per­cent in­fla­tion (com­pounded), com­pared to R5.70 at 6 per­cent and R10.10 at 8 per­cent. In­fla­tion pro­tec­tion is cru­cial, and it would be pru­dent for in­vestors to not con­sider any­thing less than an in­fla­tion­ary es­ca­la­tion.

Also keep the fol­low­ing in mind to make the most of your in­vest­ment in a re­ces­sion:

En­sure you are in­vested in the mul­ti­as­set funds with ob­jec­tives aligned to your needs, then make time work for you.

The vast ma­jor­ity of in­vestors are bet­ter served by in­vest­ing in funds that aim to de­liver spe­cific out­comes aligned to their spe­cific needs, rather than funds with nar­rower ob­jec­tives that limit in­vest­ments to spe­cific as­set classes or mar­ket sec­tors. If in­vestors have a clear un­der­stand­ing of their needs and in­vest ap­pro­pri­ately, it is a lot eas­ier to re­main com­mit­ted for the long term, es­pe­cially in more tur­bu­lent times.

Con­sider com­mit­ting the first R33 000 of your an­nual long-term in­vest­ment pro­gramme to a tax-free in­vest­ment into a suit­ably long-term ori­en­tated fund. Also con­sider open­ing tax-free in­vest­ments for your mi­nor chil­dren and grand­chil­dren and give them the gift of com­pound growth.

If you are a high-in­come earner with­out a work­place pen­sion fund, con­sider a on­ce­off con­tri­bu­tion (in ad­di­tion to your nor­mal con­tri­bu­tions) to a re­tire­ment an­nu­ity fund. His­tory has taught us, time and time again, that our abil­ity to fore­cast the im­me­di­ate fu­ture is lim­ited. We con­tinue to be­lieve that eq­ui­ties will be the strong­est weapon with which to beat in­fla­tion, and per­form­ing bet­ter than the mar­ket will be key.

The vast ma­jor­ity of in­vestors are bet­ter served by in­vest­ing in funds that aim to de­liver spe­cific out­comes aligned to their spe­cific needs.

Pi­eter Koeke­moer is the head of per­sonal in­vest­ment, Coro­na­tion Fund Man­agers. Coro­na­tion is pre­sented at the Al­lan Gray In­vest­ment Sum­mit on Au­gust 31. www. in­vest­mentsum­mit.co.za

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