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Times might seem tough at present for many long-term unit trust investors, but now is not the moment to irrationally capitulate from well-managed funds with good long-term records, says Pieter Koekemoer, head of personal investments at Coronation Fund Managers.
He fully acknowledges that 2018 was a “brutal year” for financial markets, compounded by five years of poor performance.
He also points to Deutsche Bank having described it as the worst year in over a century in terms of the breadth of declines.
“It was even worse than 1920 with 90% of global assets returning a negative number in dollars. None of the major equity markets managed a positive dollar return.”
But important to consider, he asserts, is the impact that down-periods have on future returns.
The JSE delivered disappointing returns over five-year periods six times since the 1969 market crash and, on each occasion, this was followed by above-average long-term future returns. Multi-asset funds, that give managed exposure to domestic and international shares, property, bonds and cash, have a similar track record.
The four largest peak-to-trough drawdowns in the Coronation Balanced Plus Fund since its launch in 1996 averaged a decline of 16% over a period of 11 months.
In subsequent periods, the fund returned 24.9% over the following one year, an annualised 21.6% during the following three years, and 20.3% per year in the next five years.
“Our view is that, given current depressed valuation levels of South African assets, there is a strong case to be made for expected returns over the next five to ten years in the risky asset classes to exceed returns from the income asset classes,” he says.
“If you capitulate now and reduce risk exposure, you are likely to set yourself on a lower growth trajectory.
“The upside to fair value that we currently find in the local equity market is at levels that we last observed during the global financial crisis. These valuation levels were consistent with a strong recovery in subsequent years. It is often the returns that follow disappointing periods such as the one we’re in currently that ultimately reward those who are patient.”
Critical, of course, Koekemoer concedes, is how an investor responds to market conditions. At each point along the cycle, the investor makes specific trade-offs between emotional comfort and long-term returns, all of which connect to underlying personality, circumstances and experience.
Several behavioural studies have shown that the fear of taking a risk and getting it wrong have outweighed the fear of missing out.
Simply put, potential losses loom larger than potential gains.
It is therefore understandable that many investors are contemplating giving up on the local equity market.
However, as markets enter a positive stage, the natural state of reluctance diminishes. Koekemoer says it’s pointless trying to identify turning points in the market as this cannot be done consistently with high levels of certainty.
Besides, few investors have the courage to enter at those low points.
Also important, he says, is to recognise that local economic conditions are not the exclusive determinant of local stock market performance.
While SA’s anaemic economy and weak sentiment definitely impact the returns produced by ‘SA Inc’ shares such as the banks and retailers, this is only part of the story.
Foreign exposure represents more than half of the valuation of JSE-listed companies.
Many of the global businesses that happen to be listed on the JSE have also been under the cosh for company-specific reasons, comprising the likes of Naspers*, British American Tobacco, AB InBev, Richemont and Intu Properties.
“It’s an interesting situation that current valuation levels of many of these global companies are now on par with leading local groups, despite the more attractive opportunity sets and lower risk profiles of these large and diversified businesses.”
On Coronation’s own prowess, Koekemoer points to it having added considerable value to portfolios over the past five years.
This has encompassed a commitment to the long term and quality research, persistently adjusting to market change, refining and enhancing.
“Our aim is to remain objective, independent, focused and disciplined, working hard to deliver long-term outperformance in our funds. On the downside, of course, there are periods when you underperform, which we understand can be taxing for clients”.
*finweek is a publication of Media24, a subsidiary of Naspers.
This article originally appeared in the 21 March edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.
