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Stock markets teach investors a costly lesson yet again

01 February 2007 Lucienne Fild

A year ago there was general consensus that stock market returns were likely to cool and experts cautioned investors not to expect a repeat of the phenomenal equity returns of recent years.

But despite a brief period of extreme volatility early last year and three interest rate hikes, the JSE/FTSE All share Index returned a whopping 41%.

Marc Beckenstrater, Head of Equities at Prudential Portfolio Managers (SA) and co-manager with Ross Biggs of the Prudential Dividend Maximiser Fund, says the equity market has proven yet again that timing the market is impossible and that a short-term outlook will get punished sooner or later.

The Prudential Maximiser Fund was awarded the Raging Bull Award in Johannesburg last night for the best performance over three years across the Domestic Equity General, Value and Growth sectors. Over the three years, the fund delivered a stellar 209%. The fund was also recognized as the best Domestic Equity Value Fund, while the Prudential Equity Fund was best Domestic Equity General Fund over three years.

Quarterly statistics released recently by the unit trust industry show that investors positioned themselves for a stock market correction last year and as a result lost out on yet another year of spectacular equity returns. During the last quarter of 2006, general equity funds actually suffered outflows as investors and their advisers remained cautious.

Yet the stock market has delivered a total return of 268% or around 30% a year since the current stock market boom began in May 2003.

Beckenstrater says it is unfortunate that investors continue to be scared of equities. He believes investors should consider moving away from their short-term thinking and adopt a 20-year time horizon, just as they do when they buy their residential property.

"Equities tend to bounce around a lot, yet their returns are less volatile over longer periods of time relative to bonds and cash. But investors keep on looking at short-term performance and at the slightest indication of volatility they bail for less volatile asset classes such as bonds and cash. When the volatility is over and growth resumes, these investors loose out.

"The current stock market boom has now more than repaid investors who were patient and did not bail out of the market during the bear market that followed the bursting of the IT- bubble.  Those that bailed and who have been out of the market have essentially banked their losses forever."

He explains that home owners suffer a loss in the value of their property every time that interest rates increase. However, most people are unaware of this, because they have made a long-term commitment when they invest in property and therefore dont price their property whenever economic fundamentals change.

"Unlike the stock market, your home is not priced on a daily basis.  Just because you can see the prices of shares changing every minute, does not mean you should trade, however exciting and tempting it may be.  The bulk of returns over the long-run accrue to those investors who patiently collect their dividends every year and re-invest this money in the stock-market."

His advice to nervous investors: "Invest your money in a balanced portfolio managed by fund managers with a proven track record and commit to monthly contributions for the next 20 years. This is a fantastic way to save and in 20 years from now you are very likely to exit the fund with a handsome lump sum."

Beckenstrater applies the same long-term view to the portfolios he manages for Prudential Portfolio Managers. Drawing comment from him on what the market is likely to do over the next year is therefore futile.

His comment: "If I could predict that for sure I would be a very rich man by now."

He says while it is impossible to predict what the stock market will do in the next year, investors can expect lower returns over the next five years.

"Unless markets experience a substantial re-rating, we anticipate a 12% return per year over the next five years. Considering that bonds are returning around 8%, we feel this is decent compensation from equities."

He says that the average stock on the JSE is valued at a price: earnings ratio of 12.5. Since this is a fair rating, he says, cheap stocks have become scarce.

"The stock market has become more efficient and the easy opportunities are gone. This is causing fund managers to place bets on macro economic events such as the oil price, interest rates or the inflation rate. However, we prefer looking at the valuation of individual stocks to then pick those that are under-valued and which have high yields and growing dividend streams." 

Beckenstrater and Biggs investment strategy has paid off handsomely for investors in the Prudential Dividend Maximiser Fund. The fund returned 48.3% over the one year to the end of December last year, 42.4% per year over two years and 45.7% per year over three years. 

Quick Polls

QUESTION

Each year ordinary consumers and their financial and wealth advisers flock to dozens of asset manager ‘outlook’ presentations to find out about economic and investment trends, and the next ‘hot’ company. What do you want asset managers to share during these events?

ANSWER

Asset allocation strategies
Big picture investment themes and how to position portfolios for them
Investment methodologies and historic fund yields
Share tips by the score
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