Watch that mirror

At least one asset manager is becoming concerned about the ramifications of first quarter unit trust results – not because they were poor, but because they were so good.

The concern is that investors who hoarded cash for three years will see the positive results and suddenly switch all they’ve got into equity unit trusts, ignoring diversification for an all-or-nothing approach.
 

A huge ‘bet’ solely on the basis of previous results could repeat the lag-and-lose mistakes of previous years, warns Anthony Katakuzinos, Head of Unit Trusts at STANLIB.
 

In 2002-03, many investors abandoned equities after three years of losses. They bought money market products instead, creating a year-long stampede into cash.
 

They were betting on the previous year’s experience when interest rates stayed high. Local rates soon came down by 5% and money-market investors had to settle for meagre returns of 4% after tax.
 

Investors continued to commit to income instruments throughout 2003 even though companies advised that the equity bear market was nearly over and JSE value opportunities beckoned.
 

“A year later and many equity funds have released figures showing 40-60% growth,” says Katakuzinos.
 

Such impressive results could trigger another wave of investment that lags the smart money by up to a year.
 

There is a dilemma. Katakuzinos believes there is still value in equities and many investors can benefit by beefing up equity positions. But late-comers to the equity party may have missed the really big profits this time round.
 

Now, if they make only modest gains or if the market dips, local investors will again lose faith in the asset class that should underpin most portfolios.
 

“Many investors try to play catch up,” says Katakuzinos. “They pick last year’s top fund manager or last year’s top asset class. They become disappointed if last year turns out to be a poor guide to next year. They bail out again – and repeat the process.
 

He has five tips for investors:

1. Don’t bet all you’ve got on a single asset class – go for a spread.  We know that over the long term equities is the only asset class to consistently give you inflation betting returns.
2. Don’t ignore equities. They have a central role in almost all portfolios.
3. If you are significantly overweight in cash and seriously underweight in equities, then a correction may be indicated. But don’t put all your eggs in one basket and don’t do it all at once. A phased approach is often taken by prudent investors.
4. All equity investments entail risk: the tighter the focus the higher the risk. General equity funds are less risky than specialist funds.
5. Look for buying opportunities when markets correct as we will be buying at better values. Try avoid short term market sentement.
    

Tip No. 4 is particularly pertinent when equities rebound strongly, says Katakuzinos.
 

It may be that the most impressive performers over the last year were funds focused on a particular sector. But out-performance one year by funds with a strong weighting toward a specific category is no guarantee the ‘hot’ run will continue.
 

A skittish investor making a belated return to equities might prefer to spread risk by entering a general equity fund, or a lower risk managed / balanced portfolio.
 

Editor’s note: Health warning - again, do the research, check the client profile, take expert asset management advice and do what is in the best interests of the investor.