Investment truth 101 - Sticking in the market and waiting for recovery key to long-term growth

Investors looking for answers in the wake of 2020’s market meltdown and subsequent recovery could have saved themselves a whole lot of introspection if they had stuck to long-term investment principles. This is what managers of Tailored Fund Portfolios Inflation plus 5-7% portfolio did — resulting in a return of 27.5% for the year to April 2021.

“In our view, investors should always avoid the noise and rather stay the course of their defined investment strategy. We did just that, and the returns we’ve achieved are a solid outcome considering the year 2020 was”, says Kim Rassou, Portfolio Manager at Old Mutual Wealth Tailored Fund Portfolios.

Staying in the market and waiting for recovery is key to long-term growth, says Rassou. “Once you exit the market, you end up trying to time when to get back into very risky growth assets. Unfortunately, most people don’t get it right. The global crisis of Covid-19 reminded us that nobody knows when the market will turn.”

Rassou adds that while it seems logical to move into safe-haven asset classes in times of crisis, investors could lock in losses as they miss the market rebound. Despite the market rally post the crisis, it’s unfortunate to see that even at the end of March this year, retail flows were still being directed to income funds. These investors have now missed the market recovery and entered the market at the top.

The rationale for moving into more defensive assets makes sense if you banked a return of roughly 8% yield in the average cash-plus fund for the five years up to February 2020 with basically no risk. This return compares favourably to the average fund return of 5% over the same period for the average high-equity balanced fund.

“Given the lower risk profile and lower volatility of returns, it’s no wonder that money market and income funds have attracted the majority of flows during this period,” Rassou says. “However, interest rates have changed significantly over the last year as the SA Reserve Bank cut interest rates by 3 percentage points, which is the lowest they’ve been in 50 years.

“Low-interest rates are good for those of us with debt, but not good news for investors and even worse news if you intend to draw an income from your investment. Given the low-interest-rate environment, we can safely assume that the returns from income funds will be a lot lower than what we’ve seen in the last 10 years.” With inflation slowly on the rise, in real terms, investors will see no growth on the investments in a cash-linked portfolio.

According to Rassou, this means conservative investors hoping that their savings will see them through retirement need to reassess the structure of their portfolio if they hope to meet their retirement goals.

While any portfolio needs some downside protection, Rassou says the role of a traditional safe haven is less clear in the current environment. Instead, investors should look at alternative methods to manage volatility, like the incorporation of smoothed bonus products.

She adds that while the price of safe-haven assets may fluctuate in periods of heightened uncertainty, they should revert to their pre-crisis levels faster. Gold has delivered a measly 4% in USD over the last 12 months, not much more than what we saw from cash.

“For any investor with a long-term investment horizon, allocating funds to the safety of cash is likely to lock in significant underperformance relative to a high growth strategy,” she cautions. “This underpins why we follow a stringent investment process of strategic and tactical asset allocation based on the expected return and valuation of the underlying asset classes,” concludes Rassou.