Why is there such a big difference between the average return delivered by some unit trust funds and the average return earned by investors in these funds?
A US study shows that investors typically earn returns three percentage points lower than those that funds report, while local research by Allan Gray found that the average annual returns earned by investors in the asset manager’s three most popular unit trust funds were 1.5 to 4.4 percentage points lower than these funds’ annual returns between 2000 and 2010.
This is known as the “behaviour gap” because due to our behaviour, as investors, we make mistakes that cost us in the long run.
Common mistakes include switching out of our investments when the market performs poorly (as it has in recent years), or switching fund managers to chase the latest top-performing manager, or disinvesting so that we can invest in a more popular or less volatile asset class.
If you had invested R100,000 in the SA equity market using a fund tracking the JSE All Share Index in December 2006 and stayed invested, your money would have grown to R338,022.
But if you had been spooked by the sharp falls in equity prices during the 2008 global financial crisis and moved your money out of equities and into cash, you might have ended up with only R151,797 by December 2018.
Even if you had disinvested after the global financial crisis and then re-invested in equities a year later when the market was more stable, your R100,000 may have only grown to R247, 174.
This shows how important it is to weather the storm.
Avoid being your own worst foe when you’re investing
You have to think long-term returns
Why is there such a big difference between the average return delivered by some unit trust funds and the average return earned by investors in these funds?
A US study shows that investors typically earn returns three percentage points lower than those that funds report, while local research by Allan Gray found that the average annual returns earned by investors in the asset manager’s three most popular unit trust funds were 1.5 to 4.4 percentage points lower than these funds’ annual returns between 2000 and 2010.
This is known as the “behaviour gap” because due to our behaviour, as investors, we make mistakes that cost us in the long run.
Common mistakes include switching out of our investments when the market performs poorly (as it has in recent years), or switching fund managers to chase the latest top-performing manager, or disinvesting so that we can invest in a more popular or less volatile asset class.
If you had invested R100,000 in the SA equity market using a fund tracking the JSE All Share Index in December 2006 and stayed invested, your money would have grown to R338,022.
But if you had been spooked by the sharp falls in equity prices during the 2008 global financial crisis and moved your money out of equities and into cash, you might have ended up with only R151,797 by December 2018.
Even if you had disinvested after the global financial crisis and then re-invested in equities a year later when the market was more stable, your R100,000 may have only grown to R247, 174.
This shows how important it is to weather the storm.
According to statistics for the quarter and year ended March 2019, released by the Association for Savings and Investment South Africa (Asisa), SA interest-bearing short-term portfolios attracted the bulk of net inflows (R39.7 billion), while SA interest-bearing money market portfolios received R32.8 billion and SA multi asset income portfolios R26.6 billion.
Asisa says that while the majority of investors continued to favour “the perceived safety of interest-bearing portfolios”, a number of investors were prepared to brave market volatility for the potential of higher returns offered by equity portfolios over the long term. SA multi asset high equity portfolios attracted net inflows of R24.3 billion and SA equity general portfolios R13 billion.
This shows how most investors have opted to play it safe rather than endure the risk of investing in equities, an asset class that is known to reward investors over the long term.
Since 1925, the SA equity market has delivered a real return (meaning, after inflation) of 7.9% a year, according to this year’s Long-Term Perspectives report by Old Mutual.
Morningstar says that with equities history shows that the probability of negative returns becomes negligible over time. For example, if you invested in equities for one day only, you have a 44% chance of a negative return. If you invested in equities for a week, your chance of a negative return is 42%; invest for only a month and you have a 38% chance of a negative return.
But the risk of a negative return drops to 20% if you invest for a year and then plummets to only 6% if you invest for three years.
When you are prepared to remain invested for five years, your chances of a negative return are zero.
If you’re investing for the medium to long-term, you need exposure to equities so that you can generate inflation-beating returns.
Victoria Reuvers, a director and senior portfolio manager at Morningstar, says equities deliver real returns to patient investors. “While nobody wants to get rich slowly, it pays to stay the course.”
If an investor had been exposed to the South African equity market from January 1 1995 to April 30 2019, they would have generated an annual return of 14.2%.
This period includes tough market conditions, including the emerging market crisis in 1998, the tech bubble of the early 2000s and the global financial crisis in 2008/9 – plus the past five years during which the local equity market has been relatively flat.
While at times returns have been poor, over the entire period and after inflation is accounted for, this 23-year period has generated an annualised real return of just over 8%.
“The numbers are clear: don’t worry about the noise. Think long term,” Reuvers advises.
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