Look back with interest


Investors are often told to think long term and to ride out short-term volatility. This has become increasingly difficult for South Africans, who have endured a five-year negative equity return number as at the end of 2018. However, the prognosis for growth assets over the long term is improving. 

“Investors should therefore think twice before switching into cash, even though it has outperformed equities substantially since 2014,” said Anet Ahern, CEO of PSG Asset Management at a recent roadshow for clients. “We often want a simple silver bullet to make up for the pain that market losses cause, but there is no such panacea.”

She said that 2018 was especially ‘horrific’ for investors, not just because of the steep decline in the All Share Index (Alsi), but also because of the breadth of bad news. “Usually, there are pockets of shares that continue to produce decent returns; but not last year,” she said.

In fact, globally, the majority of indices and markets in different assets classes and regions were down. In South Africa, this was coupled with continued shocks to the political and economic environment, such as the ongoing revelations of the extent of state capture and its economic repercussions.

To make matters worse, the recent GDP figure for the first quarter of 2019 showed that the local economy is teetering on the edge of recession. 

Investors are often told that past returns are no guarantee of future returns. This also applies to negative returns, Ahern said. She pointed to four previous crises that gutted our markets: the Rubicon speech, the prospect of civil war just before the political transition, the Asian crisis and the global financial crisis. At each of these points, investors experienced extreme negative sentiment.

What is interesting, she said, is to look back at what happened after previous bear markets. Going back to 1972, there have been five substantially low points in the Alsi – points where, as is the case now, the five-year return dipped below zero. What happened in the following three years?

“At worst, you got 16% per annum over three years, and at best you were rewarded with over 40% for staying in equities,” Ahern said. “For this reason, as well as others, we believe that on a balance of probabilities, there’s a good possibility that investors can get back on track by staying invested, and that we’re at an advanced stage of having seen the worst.”

One of the ‘other’ reasons is the extreme divergences in the performances of individual investments and markets that have cropped up. “Investments that are popular become increasingly popular and expensive, and investments that aren’t popular are sold down out of proportion to their intrinsic value.” 

She pointed to Facebook, Apple and Amazon in the first instance, and cyclical shares linked to economic growth in South Africa as an example of the latter.

“As a fund manager, such divergence is extremely exciting, as it gives us opportunities to take advantage of mispricing.”

Ahern said that investors need to understand that the political and economic environment are distinct from pricing and warned of the danger of conflating the two. “When they’re suffering losses, investors can act rashly, not understanding that often the current price of an asset has already more than accounted for the risk of a negative outcome. This can result in compounded losses over time.” She points out that there is no correlation between economic growth and stock market performance.  The graph below from the Financial Analysts Journal illustrates this point:

Currently, PSG Asset Management believes that a lot of risk has already been discounted into asset prices.

The results of research done by Dalbar Inc., a company which studies investor behaviour and analyses investor market returns, consistently show that the average investor earns below-average returns.

For the twenty years ending 31 December 2015, the S&P 500 Index averaged 9.85% a year – a pretty decent historical return. The average equity fund investor earned a market return of only 5.19% — just over half of what the market gave. This is largely because they fell prey to their emotions and disinvested at or near market lows (most negative sentiment) or bought into the market when prices were already reflecting all the good news.

“Investors can be their own worst enemies and need to guard against over-reacting to fear and uncertainty,” Ahern said. “What’s important is to focus on the actual return you need to achieve your goals, and not what someone else has earned, and to be totally honest with your adviser.”