South African Equity best performing asset class over long run says MacroSolutions’ Long-term Perspectives yearbook

"As multi-asset class managers it is crucial that we see the big picture, which includes understanding the major macroeconomic drivers of investment returns, such as currency and inflation,” says Peter Brooke, Head of MacroSolutions. "This yearbook aims to demonstrate how we view the long-term returns of a number of different asset classes such as gold and listed property. We blend these into a diversified or balanced portfolio, which represents the main savings vehicle in the country. With the addition of global assets and the growing proliferation of investment opportunities, a balanced fund is a much more complex and exciting investment vehicle than it was 20 years ago.”

According to Brooke, MacroSolutions has created a proprietary index, the MacroSolutions Balanced Index, which shows how a balanced fund would have performed since 1929. "The Index has performed exceptionally well, delivering a real return of 5.9% per annum,” he explains. "Last year was a particularly strong year with a real return of 15.9%; in fact, the last decade has been well above trend with a real return of 9.7% p.a. Our analysis of expected returns in the yearbook suggests a much lower real return of 4.1% into the future, requiring higher savings.”

The yearbook evidences merit in the widely held belief that the addition of extra asset classes reduces volatility and provides a smoother ride. "For instance, the ability to include global assets due to exchange control relaxation reduced the volatility of a balanced fund by 10%,” he says. "Our analysis of drawdowns in the yearbook clearly shows the benefit of diversification. It also shows that the dispersion between asset classes provides a massive opportunity to produce higher returns through active asset allocation.”

Brooke believes that the old adage of "equities for the long run” holds true with the SA equity market delivering a real return of 7.8% p.a, a track record highlighted in the yearbook. "This is a remarkable result and puts South African equity ahead of global equity over the history. Unfortunately, the past is not a guarantee of the future and we expect lower returns going forward, due to high valuations,” he says. "What the past does show, though, is that time in the market sharply reduces the volatility of holding shares.”

The yearbook also unpacks how sectors such as SA property and gold are both useful additions to the investment universe, providing good real returns and diversification. According to Brooke and his team, bonds have provided a reasonable real return of 1.5%, but the yearbook shows how variable these returns have been, driven by massive secular bull and bear markets. "The new South Africa has been good for the bond market, with a real return of 5.6% p.a. over the last twenty years,” explains Brooke, "While Cash is a poor long-term investment, only providing a parking bay when other assets are crashing.”

The yearbook shows MacroSolution’s analysis has focused on real returns and a section on inflation shows why this is so important. Average inflation of 5.6% over the last 103 years has eroded spending power by 99.5%, according to Brooke. "Putting your new born-baby through their final year of medical school in 25 years’ time could cost more than R1m per annum.”

The yearbook also outlines that Global assets are a valuable addition to the SA investment universe and shows the long-term returns for equities and bonds. However, these returns are also influenced by the currency. For instance, global bonds have delivered a real return in US dollars of 1.7% p.a. and a real return of 3.3% in rand due to the real depreciation of the currency, according to the yearbook.