Think of investing and for many people equities will be the first asset class
that springs to mind.
Why? That’s hard to say, but equities – in this case, company shares listed on the JSE – are synonymous with investing.Equities: easy to understand
Equities are almost regarded as a special asset class. Perhaps it’s because of long-term performance, where total returns tend to outstrip other asset classes.
It might also be because equities are relatively easy to invest in and keep track of.
But it’s probably because equities can be understood through the company that’s listed on the JSE, something investors can see and experience.
A top investment professional would tell the tale about taking a child, still fairly young, to a casino.
After a few hours of walking around and trying the roulette tables the young person exclaimed what a buzz it gave him.
“You like this. Do you want to own a piece of it? Then buy shares in Sun International,” was the parental advice.
Similarly, a keen cricket watcher might notice what seems increasing amounts of beer being consumed at matches.
When thinking investments, SABMiller would probably come to mind.
Or someone living near a port would see ships loaded with coal or iron ore heading for China. That could prompt research into South Africa’s coal and iron ore producers.
Those and many other examples make equities tangible to investors. They can see the companies, learn more about what they do and if prospects look good they can buy shares and share in the action.It gets better with age
But most attractive is probably long-term performance. “Over time we expect equities to outperform other asset classes. That’s the equity risk premium an investor is paying for," said Ian Troost, head of multi-assets
at Metropolitan Asset Managers.
"Ultimately, equities are a play on the economy,” he said.
Gerhard Lampen, head of Sanlam iTrade, agrees. It’s “definitely the performance” of equities that makes them a special asset class, especially if viewed over a long period of 30 to 50 years.
“There’s also the current scenario – especially if you look at the United States – where money is leaving money market
instruments into equity markets.”
Much of that money is finding its way to emerging markets, including SA. At the time of writing (mid-April) R11.6bn in foreign currency had already been spent on local equities.
Lampen said most iTrade clients, who buy JSE-listed shares directly via the online trading platform, tend to be medium- to long-term investors. “Medium-term – more than six months – probably make up the biggest group.
"They have a target price and when that’s reached they sell and look at something else,” he said.Long-term benefits
But longer time frames for equities can’t be emphasised enough. Troost reminds us that more than capital appreciation, equities should be bought for the dividend
stream. Over time, dividends account for the majority of the total return from equities.