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There is one thing that all people have in common, and that is that absolutely no one is perfect.To illustrate my point, simply take a look at the following incorrect statements made over the years:
- “While theoretically and technically television may be feasible, commercially and financially I consider it an impossibility, a development of which we need waste little time dreaming.” – The inventor of the Audion vacuum tube, Lee De Forest, 1926
- “I think there is a world market for maybe five computers.” – Thomas J. Watson, chairman of IBM, 1943
- “It doesn’t matter what he does, he will never amount to anything.” – Albert Einstein’s teacher to his father, 1895
- “It will be years before a woman either leads the party or becomes prime minister. I don’t see it happening in my lifetime.” – Margaret Thatcher, 1974
- “We don’t like their sound, and guitar music is on the way out.” – Decca Recording Company executive turning down The Beatles, 1962
I consider ignorance to be the main cause of such incorrect statements.
With markets becoming quite volatile over the past few months, investors have become well aware of the fact that shares do not necessarily always move upwards in value.
On the flip side of this coin, the problem with the money market is that the after-tax returns can hardly keep up with inflation.
When I recently recommended to an investor to consider multi-asset income funds as an alternative, however, his response was: “But that is exactly the same type of investment and such low after-tax returns is a waste of my time.” – Ignorant investor, 2016.
Before we get into why I recommended multi-asset income funds as an alternative, let’s take a quick look at what they are.
These funds are unit trusts that invest in bonds, fixed deposits, money- market instruments, property shares (up to 25%), preference shares and other high-yield stocks (up to 10%). The funds aim to deliver maximum returns, along with capital stability or moderate capital growth to investors. The underlying risks and returns can vary from fund to fund due to the difference in strategies and mandates between the various funds.
But what is the difference between multi-asset income funds and money-market funds?
1. Returns
If you had invested R100 in the money market five years ago, your capital would be worth around R130 today, before taxes and after costs, income and capital growth. This is an annual return of 5.41% on your investment.
If you had invested the same R100 in an average multi-asset income fund five years ago, however, your capital would be worth R140 before taxes and after costs, income and capital growth – an annual return of 7% (1.6 percentage points higher than a money-market investment).
2. Risk
When considering a money-market investment from a risk perspective, you will see that with an annual standard deviation of only 0.2% over a five-year period, the money market barely poses any investment risk.
Multi-asset income funds’ standard deviation, on the other hand, amounts to 1.3% over the same five-year period. Yes, it delivered better growth, but it also posed a higher risk.
But when we compare this to the stock market’s 11.3% standard deviation over the same period, multi-asset income funds’ risks suddenly appear much more attractive. Of course shares grew by 14% per year over this five-year period, which amounts to double the growth you would have earned on a multi-asset income fund, but it also means that you would have taken 8.6 times the risk to earn double the growth.
For the higher risk investor, this would have been perfectly acceptable, but for the more conservative investor, it would have been a very bumpy ride on a wild roller coaster.
As much as I love shares, I know that there is a time and place for everything. With markets on the volatile side at the moment, I definitely think that there is a place for multi-asset income funds in your investment portfolio.
Don’t allow ignorant opinions to determine the outcome of your investment decisions.
Schalk Louwis a portfolio manager at PSG Wealth.
This article originally appeared in the 4 August edition of finweek. Buy and download the magazine here.
