Don’t set the bar too low

Financial Mail - - INVESTOR’S NOTEBOOK - @scranston by Stephen Cranston

Hav­ing spent the first years of my work­ing life in an en­vi­ron­ment where 20% in­fla­tion was quite nor­mal. I tend to look at a re­turn on in­vest­ment of 13% a year as medi­ocre. It isn’t, of course. At to­day’s in­fla­tion rate it is a real re­turn of about 8%. This is close to the long-run real re­turn from bal­anced funds over the past 30 years. But over the past five years, in­vestors have been lucky to even match in­fla­tion.

A study by the multi­na­tional as­set man­ager Schroders shows that most SA in­vestors also con­sid­ered 13% to be a re­spectable re­turn. Yet in the past five years the best large man­ager’s bal­anced fund, In­vestec, gave just 9.2% a year, and the weak­est, Stan­lib, 5.9%.

The sim­plest way to avoid dis­ap­point­ment is to have low ex­pec­ta­tions, but we can’t set the bar too low. There will be years of neg­a­tive re­turns, and plenty with subin­fla­tion re­turns, but we should re­sist the temp­ta­tion of mov­ing out of risky as­sets such as eq­ui­ties and prop­erty for the false se­cu­rity of cash.

Claire Walsh, per­sonal fi­nance di­rec­tor of Schroders, looked at 30 coun­tries to see the dif­fer­ence be­tween ac­tual and ex­pected re­turns. SA’S in­vestors look wildly op­ti­mistic, hav­ing ex­pected 12.8% re­turns, 8.4% ahead of the mar­ket over five years. And this was in a sur­vey of 22,000 wealthy peo­ple around the world. But this gap was ex­actly the same in Chile, Por­tu­gal, In­done­sia and even the fi­nan­cially so­phis­ti­cated United Arab Emi­rates. The Rus­sians were the most op­ti­mistic, with ex­pec­ta­tions

13.4% ahead of the mar­ket re­turn.

Walsh says the MSCI world in­dex has given a

12.2% re­turn over five years. But the JSE has de­liv­ered dis­mal re­turns of 6%, only just above in­fla­tion.

Some coun­tries will be de­lighted to have seen re­turns well ahead of ex­pec­ta­tions. With very lit­tle re­turn from cash or bonds, un­til very re­cently, US in­vestors con­sid­ered an 8.5% re­turn to be sat­is­fac­tory, yet the re­turn of 13.1% has been the best in any of the 30 mar­kets that are mea­sured. The only mar­ket that comes close is In­dia, with a 12.9% re­turn, but its in­vestors, used to the emerg­ing-mar­ket risk premium, ex­pected a 13.7% re­turn. The high­est ex­pec­ta­tions were all in emerg­ing mar­kets such as Thai­land and Brazil.

China, with an ex­pec­ta­tion of a 13.1% re­turn, was greed­ier than its neigh­bours in Tai­wan, with an 11.6% ex­pec­ta­tion.

It is hard to com­pare SA, which still has an in­fla­tion­ary prob­lem, with coun­tries that have flirted with de­fla­tion, such as Bel­gium and Switzer­land.

Rand de­pre­ci­a­tion

We would be con­fin­ing our­selves to low long-term re­turns if we ex­pected our fund man­agers to give a 7% re­turn as the Bel­gians do, or the 7.4% that is ac­cept­able to the Swiss.

Schroders be­lieves a 5.6% re­turn from a multi-as­set or bal­anced strat­egy over the next 10 years is re­al­is­tic. With rand de­pre­ci­a­tion, let’s call that about 8%-10%.

It is not sur­pris­ing that many pru­dent as­set man­agers are bring­ing money back to SA. This re­turn can be achieved just by sit­ting in SA sov­er­eign long bonds, with lit­tle need for tak­ing the risks of a tra­di­tional 65%-75% in eq­ui­ties.

Walsh says fore­casts should not be re­lied on for fi­nan­cial plan­ning — but then in my view only a mi­nor­ity of fi­nan­cial plan­ners can be re­lied on for ef­fec­tive plan­ning any­way.

I won­der whether mil­len­ni­als, who have no ex­pe­ri­ence of dou­ble-digit in­fla­tion, have a dif­fer­ent per­spec­tive. Maybe the 6%-9% re­turns from the Large Man­ager Watch are ad­e­quate to them, as they don’t an­chor ex­pec­ta­tions in the 13%15% range. But even they won’t find an in­fla­tion­track­ing re­turn ac­cept­able.

Re­turns can be achieved just by sit­ting in SA sov­er­eign long bonds

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