The long-term consequences of your investment decision
Robert Lee Frost (1874 to 1963) was a highly regarded American poet. According to wikipedia.org he used rural 20th Century New England settings to examine complex social and philosophical themes, scooping four Pulitzer Prizes for Poetry along the way. Asset management is all about choice and decisions, so I thought it appropriate to begin today’s newsletter with a paragraph from Frost’s oft quoted poem, The Road Less Travelled. The first stanza reads:
Two roads diverged in a yellow wood
and sorry I could not travel both
And be one traveller, long I stood
and looked down one as far as I could
to where it bent in the undergrowth;
At any point in time fund managers and investors face a similar predicament. They must choose from dozens of investment paths (combinations of financial instruments) which will hopefully deliver on their stated investment outcomes (the destination). These days the investment decision is trickier than ever. Aside from the all-important asset allocation decision – and the myriad financial products you can choose to implement it – local investors have to decide how much of their capital to invest locally and how much to diversify offshore. A decade ago – like today – the decision appeared simple.
Different path – different outcome!
The problem is that not all paths lead to the same long-term investment outcome. The graph which got me thinking about Frost and poetry was the first slide in a presentation by Investec Value Fund manager John Biccard at the company’s Sandton headquarters, 16 February 2011. It shows the 10-year performance of his Investec Value Fund versus the JSE All Share index and three popular offshore indices (Japan, the UK and the US).
At the end of 2000 early 2001 South Africa was very different to the country we know and love today. At the time the rand was falling out of bed, devaluing swiftly against the British pound and US dollar. South Africa was only a few years into democracy and many thought the political risk would wipe out equity market returns. Some preferred to invest conservatively at home, favouring money markets, bonds and other near-cash options over equities. The rest were tripping up over each other in an attempt to take their full offshore allowance out of the country before the “situation” worsened. These individuals have travelled a long way down the wrong investment path.
In the 10-years to 31 December 2010 each R100 000 invested offshore in equities would be worth R100 000 today, give or take a few rand. Over this period those who were cajoled to “get your money out, while you still can” have suffered the most humiliating investment return possible – a 0% annual compound return. Had you remained in South Africa and backed the JSE All Share index your R100 000 would be worth R350 000 today. And I doubt many would be unhappy with the 13.35% annual compound return these numbers represent.
The value in value
The return just mentioned is termed passive return – what an investor earns by simply tracking an equity benchmark. If you’d taken the decision to back the Investec Value Fund to provide you with so-called alpha – the returns generated by “smart” investing – your R100 000 would be worth R1.4 million today! That’s a staggering 30.2% annual compound growth!
Biccard shared some of the reasons for the fund’s success. “We don’t aim to be the top fund in a given year, but rather to rank in the top quartile,” said Biccard. “If your fund ranks in the top quartile over a period of five or 10 years, you’re guaranteed to be near the top of the long-term return rankings.” And that’s exactly where the Investec Value Fund is today. Through careful share selection strategies Biccard and his team ensured that the Investec Value Fund ranked in the top 25% of equity, growth and value funds in each of the past 10 years. Over the same period his fund topped the average performance across these categories by an amazing 11.4% per annum!
Taking the road less travelled by
In today’s newsletter we talked about three roads – three choices – and three VERY different results... I’ll conclude today’s slightly different investment newsletter with the closing paragraph from Frost’s poem:
Two roads diverged in a wood, and I –
I took the one less travelled by,
and that has made all the difference
The road less travelled by, in this instance, was to stay invested in local equities in a well-managed fund. Looking 10-years hence it seems the investment journeyman should only now be thinking about the road that leads offshore
Editor’s thoughts: Investors who make “wrong” investment decisions often only discover their error five or 10 years down the line. There’s no way to be 100% sure of your strategy upfront – which is why most of us rely on long-term historic returns as a proxy for what a particular strategy might deliver. Right now – with local equities looking expensive and the rand strong – it might be time to back offshore equities. Have you started thinking about taking some money offshore, or does the 10-year developed world equity track record make you nervous? Add your comment below, or send it to gareth@fanews.co.za
