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In the edition of 26 November 2015, I warned against our tendency to be influenced so strongly by monthly investment figure publications, that we often choose the previous year’s best performers as our future investments, despite historical data showing this may not be a wise investment strategy.
By taking a look at last year’s 10 best- and worst- performing Domestic General Equity Unit Trusts, you would have been lucky if you were invested in the 10 best performers in 2015, as your investment would have increased by an average of 17% in an environment in which the average Domestic General Equity Sector only grew by 1.6% over the same period.
Most of the top 10 funds, however, contained very few commodity shares and eight of these funds contained the two largest shares on the JSE, namely SABMiller and Naspers*, which grew by 55% and 40% respectively in 2015.
But the 10 worst-performing unit trusts would have treated you much worse, as your capital would have dropped by more than 16%.
It is safe to assume then, that it would be in our nature to want to choose last year’s top 10 performers, simply because of their amazing returns in 2015.
Unfortunately, managing investments and risk isn’t quite as simple, because even if it's ultra-short-term, last year’s top 10 performers would have caused you to lose more than 5% of your capital to date in 2016, while the Domestic General Equity Sector (also down by 2.4%) would have provided you with approximately 2.7% better returns so far.
The most interesting aspect of this data emerges when you take a look at the top 10 worst-performing funds in 2015.
These funds not only outperformed the 10 best performing funds in 2015 in the first six weeks of 2016, but with their 5% growth, they also managed to outperform the FTSE/JSE All Share Index and Domestic General Equity Sector.
I definitely do not recommend that you choose the worst-performing unit trust funds each year to compile your future investment portfolio, but rather that you refrain from limiting your choices to which funds appeared to be doing well in the past.
Manage your risk and know your investments well, especially the underlying costs associated with such investments.
If you, for example, are paying more than 1.52% Total Expense Ratio (TER) for a Domestic General Equity Unit Trust, there are two things you need to know: Firstly, that this is above the sector average and secondly, that it takes an extremely well-managed and stable returns-history to justify such an expense.
The risk and costs involved in your investment are within your control. Growth over the long term, however, will take care of itself.
*Schalk Louw is a portfolio manager at PSG Wealth.
*finweek is a publication of Media24, a subsidiary of Naspers.
This article originally appeared in the 25 February 2016 edition of finweek. Buy and download the magazine here.
