Hedging your bets to benefit from no negative returns - Momentum launches Positive Return Fund

The concept of compounding return is quite remarkable but one that the ordinary man in the street usually knows very little about. Albert Einstein once called it "the greatest mathematical discovery of all time."

Compound interest may be a miracle but negative compounding is misery. Many investors who followed “conventional wisdom" of long only equity investments ran into the devastating effect of negative compounding of 2008/2009. There is no reason to assume future returns will be as high as in the past, (pre 2008). The Dow showed zero growth from the late 1890s to the 1930s. Could the late 2011s be a similar predictor? Will the Dow be lower than today in the 2030s? Japan has had negative index "growth" over the last 25 years. If it can happen in the two largest economies it can certainly happen elsewhere!

The question investors must ask is: could you wait years for the so-called equity risk premium or upward drift of the equity markets to reassert itself or would you rather make positive returns in the meantime? Negative periods can destroy value and diminish returns severely. As Warren Buffett puts his investment strategy:

1. Don't lose money and;

2. Don't forget rule No.1.

So why is positive compounding so important and how does it work? Well it only really gets interesting at higher return levels. Over 20 years at 4% compounded R100 grows to just R219. At 8% to R466. However at 15% to R1,636 and at 30% to the princely sum of R19,004, which is why positive return investors such as Warren Buffett, are billionaires.

As usual the story is more complex than simply letting compounding do miraculous work. Negative years following a previous negative year severely impacts long term planning. If you lose 50% you need 100% performance to just get back to break even. Positive compounding is a convex function; it gets much more effective at higher numbers but of course sadly also for negative compounding.

Contrary to what we are led to believe, investors can only spend positive compound returns, not average returns. Nevertheless, the average returns are so often mentioned by those seeking to promote an investment approach.

This practice can often mislead investors who don't understand how money is made and lost over a period of time, due to compounding, in markets that move up in one year and down in the next. There are two factors that can have a significant impact on the realized returns experienced by investors: the dispersion of returns and the impact of negative returns. Avoiding negative compounding is the key to successful investing. One of he best way for investors to achieve target returns and avoid negative compounding is an allocation to a well managed, protected equity strategy.

So how does one hedge your bets and benefit from positive market performance and catch the upswings and soften the downswings? The Momentum Positive Return fund is ideally positioned for investors who are concerned with market performance and preserving capital. The fund is a modern strategy fund that pursues positive returns with lower volatility than traditional funds, to help diversify portfolios for all kinds of investors

The fund has two distinct objectives.

Firstly, to preserve your investment capital. Capital preservation is a key investment principle. Preserving capital ensures that you do not lose the benefits of compounding. Suppose you invest R100 in an equity fund and the first year it is up 20% and the next year it loses 20% and this up/down cycle repeats for 20 years. (Such a scenario is not as unlikely as it sounds – look at the US stock market since 1995). How much will you have at the end? The surprising answer is you would have a grand total of R66 and inflation kills whatever purchasing power R66 will have 20 years from now - a stick of gum, a can of soda or a litre of petrol. Avoiding major drawdowns is critical to future long-term wealth creation.

Capital preservation is therefore an extremely important investment principle. This fund aims to preserve capital by having no negative returns over a rolling 12-month period.

Secondly, for your investment to achieve “real returns” i.e. returns that beat inflation, you need equity-type exposure. In an uncertain and highly volatile economic environment, cash alone is not able to provide returns that keep up with inflation. To achieve real returns you typically need to take on higher risk than cash. This fund adds protected equity exposure so that you have exposure to equities but with protection built in should equities perform poorly. This prevents your investment from being fully exposed to equity volatility.

Having worked hard to accumulate savings, the last thing you want to do is put your capital at risk. Now you have the opportunity to grow your investment steadily in rising markets through protected equity exposure. The Momentum Positive Return Fund provides an opportunity to invest in a fund that will preserve your investment capital and give you growth when markets rise. The combination of capital preservation and cautious equity exposure can help you achieve your investment goals.