Victoria Reuvers / 11 August 2019
To quote billionaire investor Warren Buffet, ‘the investor of today does not profit from yesterday’s growth’.
For several years now South African investors have received little reward for taking risk – particularly those invested in South African equities and/or listed property companies. Those invested in low or high equity (regulation 28 compliant, pre-retirement capital) funds and portfolios haven’t been much better off due to disappointing returns over the past five years. The poor returns can be attributed to a range of factors, with limits on offshore allocations combined with disappointing local equity returns at the fore.
The poor returns have introduced a far higher rate of churning between investments than in previous years. It’s human nature – in times of low returns, investors look at previous winners and switch their investment to include these performers, hoping for the same outcome as in the past.
To quote the legendary Warren Buffet, ‘the investor of today does not profit from yesterday’s growth’. As much as we are warned that past performance is no guide to the future results, many investors still switch to the latest hot offerings just before the inevitable slump in performance.
Morningstar recently conducted research into the area of investor returns and created a hypothetical ‘Performance Chaser’ portfolio. This portfolio sees investors switching their investments into the best performing fund from the previous year at the start of each calendar year. This is then compared to two portfolios managed by Morningstar – the Morningstar SA Multi-Asset Low Equity and SA Multi-Asset High Equity portfolios.
The research aims to illustrate, by means of comparison, the returns achieved by the performance chasers versus the returns achieved by investors that remained invested in their respective portfolios over the same time frame.
Fig 1: Low Equity: Performance chaser vs Morningstar Cautious
Fig 2: High Equity: Performance chaser vs Morningstar Adventurous
As can be seen in the above two graphs, the difference in the returns were quite astonishing.
The Morningstar low equity portfolio returned 6.3% more than the Performance Chaser portfolio over a period of four years. In other words, an investor with an investment of R1 million that stayed the course (and remained invested in the Morningstar low equity portfolio) would have gained an extra R63 095 in returns.
The difference is even more pronounced in the high equity portfolio. In this case, the Morningstar Adventurous portfolio returned 13.93% more than the Performance Chaser portfolio over a period of four years. In other words, an investor with an investment of R1 million that stayed the course would have gained an extra R139 269 in returns.
The above scenario clearly highlights the benefits of staying invested in a robust and consistent strategy as opposed to backtracking and chasing yesterday’s winners.
Let us examine the possible reasons for the underperformance of yesterday’s winners:
- The selected funds’ good ideas have all paid off and the returns have been realised.
- They may have had an aggressive view that played out in their favour. It’s unlikely that the view will continue for the foreseeable future and could potentially be the top of the return cycle when an investor invests into the fund.
- This view could have been pure luck and not a solid investment thesis that the manager followed. For example, the fund could have been underweight offshore and then the rand strengthened due to a global risk on trade.
What does this mean for investors?
Returns don’t happen in straight lines and it seldom occurs when one expects it to.
It’s vital to separate emotion/sentiment from an investment portfolio. Often the most beleaguered investments turn out to be a great opportunity for future returns, as investors can access these investments at a good price.
Volatility creates opportunity and short-term underperformance can translate into a solid, longer-term upside.
Trying to chase performance can be extremely harmful to an investor’s returns over the long-term. It’s rare for even professionals to consistently time investment in to and out of the market over time. In addition, one needs to consider the costs of trading funds, which is likely to only make matters worse.
A well-diversified portfolio that is designed to meet your investment goals whilst remaining within your risk tolerance is a far better solution, and much likelier to result in long-term investment success than trying to buy yesterday’s winners.
The Bottom line: investing is a marathon and not a sprint. If you have a five-year investment horizon, remember to keep a long-term view – don’t worry too much about your returns for the first three to five years. When it comes to investing, patience is rewarded.
Victoria Reuvers is the director and senior portfolio manager at Morningstar Investment Management South Africa.
The views and opinions shared in this article belong to their author, cannot be construed as financial advice, and do not necessarily mirror the views and opinions of Moneyweb.