How not to make money

Investors repeatedly shoot themselves in the foot

By Andró Griessel

21 Sep 2019

In May 2014 I wrote an article named “Beware the rear-view mirror” in which I mentioned that it would be highly unlikely that we will see a repeat of the preceding decade’s remarkable returns and that it would be prudent to reduce your exposure to this asset class.

For context, please refer to the performance table of the four best general equity funds over a one, three, five- and ten-year period at that stage.

Over the preceding five years the average return from the JSE was 20.98% per annum compared to cash and income funds which delivered rather timid returns ranging between 5.72% and 7.71% per annum.

For anyone looking at this on face value, the allure of continuous high returns would have been very tempting, and the “obvious” choice would have been to take all your capital and plunge it into South African equity.

This past performance was the exact reason why I and other market commentators were warning people that this type of growth could not endure.

Remember, even trees that grow quickly, cannot reach the moon.

What did investors do with their capital at that time?

See below an analysis of the flow of capital in the second quarter of 2014:

Source: ASISA

• Funds with high equity exposure received inflows of R11.6 billion
• Funds with moderate equity exposure received inflows of R2.1 billion
• Funds with low equity exposure received inflows of R4.5 billion
• Cash and income funds garnered little attention, on the contrary, it suffered a net outflow

In the subsequent five years until 30 June 2019 the asset classes referred to above produced the following returns:

• South African equity = 5.64% per annum
• South African money market = 6.89% per annum
• South African income funds = 7.18%

So what are investors doing now?

Yes, you guessed it… They are rapidly selling out of relatively cheap South African equity after they have bought this asset class five years ago at a massive premium and they are now parking their capital in money market and income funds. See below graph as reference.

Source: ASISA

The second quarter of 2019 experienced almost exactly the opposite flow of capital compared to the second quarter of 2014.

Investments in equities experienced material net outflows whereas capital flowed almost exclusively into cash and income funds.

What does this tell us?

• It is ironic that investors would want to withhold tax from a government that spends it wastefully, but then invest close to R30 billion in one quarter into interest bearing funds where almost 100% of these funds deliver after tax returns which barely beats inflation. Please read the article “Tax on interest might be costing you” dated June 2018.
• Regardless of the “take-all-your-money-offshore” rhetoric, investors still choose cash as the safe bet in uncertain times. In this specific quarter there appears to be no material migration into offshore investments. This speaks to a general atmosphere of uncertainty currently experienced amongst the investing public. Remember though that some of the best opportunities within financial markets are borne in times of uncertainty.
• Both sets of data exacerbate the notion that investors and/or their advisors do not learn from their mistakes of the past. Capital is still flowing into funds when they have delivered decent historical returns (typically when they are expensive to buy) and out of funds when they do badly (typically when they are cheap to buy). Please read the article “History says little about future” dated October 2019.

What must an investor do then?

By now you are probably thinking: “If you are such a clever cat, where must we invest then?” Unfortunately, the proverbial crystal ball does not exist, and we are left to our own devices when having to decide where the best place is to invest. In the same breath there is not one shoe that fits all feet, so general comments around where to invest would not only be reckless, but also inappropriate.

What I could say is this:

• If investing were intuitive, then more people would achieve investment success. The best opportunities usually present themselves where you least expect them and typically when pessimism is rife. Regarding pessimism, there is currently an abundance thereof in South Africa and JSE listed companies are reflecting this.
• Tax exemptions on certain products (especially if you are a high-income earner) provide a proverbial free lunch. To not make use of this is financially foolhardy.
• Start with the low hanging fruits, typically with low valuations, when building a diversified portfolio and test it against several outcomes such as a strong rand, a weak rand, a downgrade to junk status, an upgrade, a second term Trump presidency, Brexit etc.

In closing, neither I nor anyone else can see into the future, but I would be very surprised if cash and income funds outperform South African equity over the next five years on a gross basis, not to even mention on an after-tax basis. It appears however that the investing public is (a) thinking that this will be the case or (b) that he or she will be able to re-enter the market at the perfect time.

With reference to the last-mentioned strategy, history suggests that the data is not supportive of this approach.

Andró Griessel is a certified financial planner and managing director of ProVérte Wealth & Risk Management. Contact him at info@proverte.co.za

Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. ProVérte Wealth & Risk Management is an authorised financial service provider with FSP no. 5966.