Should you rethink your investment strategy?
It is not often that investors who sold their equities and investors who held on to their equities both have reason to grimace. But 2008 might be such a year. Investors need to take particular care in constructing their portfolios in such an environment, says David Crosoer (pictured right) from Glacier Research.
The All Share bottomed out on the 23rd of January this year. Investors who couldn’t stomach the volatility and sold out at the worst possible time could have banked an 11.9% return by investing in cash. Investors who stuck with their equity manager would in the past six weeks have (just) made up the annual yield on the cash, but they would have lagged the 20% plus recovery in the All Share Index by a considerable amount. Both these investors might have reason to be disappointed.
The surge in the All Share Index has been driven by higher commodity prices and a depreciating rand. Resource shares (which benefit from both) were up over 45% at one stage (they’ve given up some on their gains the past week on the back on a stronger rand). The five week rally in resources was equivalent to the entire year’s gain in the All Share in 2006. In contrast, the Financial Index is basically flat and the Industrial Index’s gain in double digits (just). Increasing inflationary concerns have impacted on cash yields which are now higher than they were a month ago.
General Equity Managers have missed out on the spectacular run in Resource Stocks. Resource Stocks are driven by commodity prices and currencies, and these are the two variables that most fund managers believe they can’t accurately forecast. But they’re critically important for investors who feel their impact via rising inflation.
The recent outperformance of the Resource Index might indicate the beginning of an environment of uncomfortably high inflation. In this scenario, by definition, commodity prices stay high, and by default (given deteriorating economic fundamentals) the rand depreciates. Such an environment will be nasty for most fixed income assets and difficult for most fund managers who underweight resource stocks because they struggle to forecast them accurately.
What can you as an investor do about this? Holding cash is only a temporary solution, as at some stage you will need to re-enter the market. But if you are concerned about higher inflation, and at this stage it looks unlikely that inflation will surprise on the downside, cash is still preferred to property or bonds.
And for investors who are prepared to live with the volatility of equities? Don’t discard your active equity manager – the environment might allow him to pick up a number of bargain stocks. But including a low cost index fund that benchmark-weights the resource index does not look like an outrageous idea, and will help protect your portfolio against the inflationary effects of a weaker rand and higher commodity prices.
