No room for emotions when investing
Not only do investors have to grapple with volatile stock markets and endure worrying economic conditions, but in addition they also have to make sense of continuous debates among experts about which are the better approaches to asset management: value or growth, active or passive.
John Kinsley, Chief Operating Officer of Prudential Portfolio Managers (SA), says instead of worrying about picking the one asset manager following an approach likely to outperform all others, or choosing the one asset class that will do the best, your strategy should centre on appropriate diversification.
“If in addition you are able to take emotion out of your approach, you are likely to take investment choices that will help you achieve superior returns over time.”
Kinsley says the ability to make decisions without the influence of emotions is one of the most important skills of a successful asset manager. Often it is this ability that enables investors to diversify appropriately – generally this involves investing your money in an asset class, a region, or a stock that has fallen out of favour with the market.
Take the Prudential Global High Yield Bond Portfolio as an example. Global bonds underperformed most other asset classes during 2007 with global corporate bonds suffering further as a result of the global credit crunch. Kinsley says the performance of the Prudential portfolio was therefore not very exciting for most of 2007.
“Needless to say investors stayed clear of it. But then during the period from late October 2007 through to February this year the JSE All Share Index endured a roller coaster ride, at one point almost shedding all the earlier gains of 2007. Meanwhile global bonds enjoyed something of ‘a flight to quality’, and this, together with the weakness in the rand, meant that the Prudential Global High Yield Bond Fund of Funds produced a return in rands of over 27% for the first quarter of 2008.
“All our clients’ global balanced portfolios have a portion invested in global bonds. While last year this may have been psychologically difficult to hold on to, it proved an amazing buffer against volatility at the beginning of this year.”
Kinsley says for investors the biggest learning is that different asset classes and stocks will perform differently when market conditions change. Equally, he says, the various approaches followed by asset managers will produce different results at different times.
“For the past year or two, as valuations became more and more concentrated, many value managers struggled against their more growth orientated competitors. This was a global phenomenon as the performance charts show. But after recent events value managers are now able to plan ahead by scouting for cheap stocks likely to be tomorrow’s darlings. And for the past two years or so, the majority of active equity managers found it difficult to beat their benchmarks such as the JSE All Share Index, leaving passive managers to gloat.”
But this may all change without much warning, says Kinsley. The question is whether you as an investor are geared for this change?
“When in January this year the JSE All Share Index reached its lowest point and investors were fleeing equities, our fund managers started buying equities and listed property. While this was difficult from an emotional point of view, we were rewarded when the market started turning days later.”
Kinsley says he witnessed a fund of funds manager sell all listed property holdings in January, a day before listed property bounced back by 3%. “Not only did this manager materialize a loss for his investors, but he also proved that market timing never pays.”
Kinsley says investors should not adopt a blanket approach that dictates that going against the herd is best. Instead, he says, you need to develop the discipline and conviction to buy when the market is cheap and to include “out of fashion” opportunities where necessary to diversify the portfolio.
According to Kinsley, the diversification principles need not only apply to assets. If the debates about value and growth or active and passive are leaving you confused, you could consider diversifying across asset managers as well.
Remember though, if your investment portfolio was constructed in line with your long-term needs and diversified accordingly, you have nothing to worry about. If not, best you get some advice sooner rather than later.
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