Why Local Investors Need to Stay the Course, Despite Low Returns

Stagnant market calls for a cool head…

Over the past three years, most SA investors have been disappointed with their returns. This is unsurprising, given the figures. For example, the average SA Multi-Asset High Equity unit trust did 3.4% per annum over the three years ended March 2018. Overall, the available asset classes have delivered poor returns, as can be seen in the table below.

 Let’s take a closer look…

The traditional engine of growth – equities (both local and offshore) – fell below 10% per annum. Although global equities delivered above-inflation returns in USD, rand strength sapped the returns of local investors.

Given the above, investors may be questioning why they should stay invested.

Notably, history illustrates that a negative real return (return after inflation) from equity markets over the short to medium term is not that uncommon. However, over the long term, equities remain the primary driver of wealth.

Indeed, over the past 27 years (since the start of 1990), the local equity market delivered a return of 13.9% p.a., well above inflation of 7.4% p.a. Understandably, factors such as monthly income requirements means that most investors do not have a 27-year horizon.  Working with rolling 3-year periods is more useful for such investors (see below).

Rolling three-year real return p.a. on the FTSE/JSE All Share Index January 1990 to March 2018

A closer look at the above reveals that there were a number of periods whereby investors have needed to tolerate negative real returns (returns above inflation) over the medium term in order to enjoy the long-term benefits of equities.  The average real return (p.a.) over the three years following all negative three-year periods is 13.7%.

In short, these facts underscore why abandoning the market at the point of discomfort is a traditional mistake – and one certainly needs to think clearly before taking action on the basis of fear…

Source:  Investec Group, Bloomberg