Long-term investing in growth assets provides the best returns
Old Mutual report filters out the noise and plots performance of different asset classes over a number of years
THE PAST few years have been gruelling ones for South African unit trust investors, and you may have become disillusioned with the equity market in particular, which last year delivered the worst results since the 2008 financial crisis. You may take comfort, then, in the Old Mutual Investment Group’s latest Long-term Perspectives report, which provides reassurance that things are not as bad as they might seem and may even be looking up.
The annual report has consistently shown, since its inception in 2014, that long-term investing in growth assets, particularly equities, provides the best inflation-beating returns.
Its aim is to filter out the noise for investors, which often results in bad investment decisions, by plotting the returns of different asset classes over many years and comparing them with the returns of the Macrosolutions Balanced Index, which represents a typical South African balanced fund.
Some important take-outs for investors from this year’s Long-term Perspectives report (also see “Eight lessons for investors”) are:
◆ The poor returns from equities over the past few years and 2018 in particular have brought returns back, more or less, to the long-term average. So although you may be disappointed in the recent performance of your investment, you may also have enjoyed the above-average performance in the years immediately following the 2008 financial crisis. Unfortunately, many investors came to believe this above-average performance was the norm, says a member of the team responsible for the report, Graham Tucker, portfolio manager of Macrosolutions balanced funds. He says five years ago, the equity market was far too high. “One of the reasons for starting Long-term Perspectives was to put these high returns in perspective for investor,” he said at the recent launch of this year's report.
◆ While globally equities are still considered overvalued, value is starting to return in the local equity market, presenting buying opportunities.
◆ Diversification offered by a balanced fund “smooths out” the investment ride while delivering almost the same long-term returns as a pure equity portfolio.
Looking at the main asset classes in turn, as at December 31, 2018:
EQUITIES
Although volatile, the local equity market has shown a strong upward trend throughout most of the 20th century and into the 21st century. As one can see from the graph, the market has essentially returned to its long-term average after being one standard deviation above average in 2014 (a standard deviation is a statistical measure of how far a datapoint deviates from the mean). Since 1925, the South African equity market has delivered real (afterinflation) returns of 7.9%.
The more expensive the market (the higher the share prices relative to company profits), the lower the subsequent five-year return and vice versa, the report points out. The price-to-earnings ratio of the JSE fell in 2018, which “means that some value has returned to the market and we would expect slightly better real returns going forward”. The report forecasts real returns to average 5.5%.
LISTED PROPERTY
Following difficult conditions in the 1980s and 1990s (real returns