To build long-term wealth make volatility your friend

The wealth-enhancement tip comes from Chris Botha, senior fund manager at Imara Asset Management South Africa.

 

The Illovo-based financial services firm has a growing client-base of retail investors whose overriding goal is significant real returns in the face of high inflation and tax rates that slice into any income from interest-bearing instruments.

 

Equities have the best long-term record for building wealth that withstands taxes and inflation, but market volatility makes the average salary-earner fearful. Get over the fear and you can get started on serious wealth-building, says Botha.

 

He notes: "A key statistic should interest the average investor: only 1% of Americans – those on the Rich List – have so far recovered from the Great Recession of 2007-09. Everyone else is struggling.

 

"Why? Because the rich never abandon the market. They stay invested. They buy when share prices tumble. They ride market cycles and benefit when markets recover as they have done this last five years. The rich make volatility their friend. So should ordinary investors.”

 

In Botha’s view, the challenge in South Africa is adapting to our status as an emerging market (EM) and the consequences of this categorisation when the big money controlled by international fund managers moves around.

 

He points out: "To the rest of the world, we’re just another EM; worse, we are a proxy for all EMs because we have very liquid markets and global fund managers can move in and out at will.

 

"It’s a global trader’s dream and a recipe for continued volatility. We have to toughen up and adapt.”

 

The good news is big market swings can create big opportunities.

 

"Good local companies don’t become bad companies because a bunch of global fund managers get nervous about Turkey, India and Mexico,” says Botha.

 

"International sentiment has turned bad, not the company. This creates value opportunities for asset managers with a mandate to build real wealth over three to five years. This opportunity is increasingly exploited by investment professionals who buy into globally triggered dips and ride the cycle.”

 

Being friends with volatility is one reason some local equity funds have enjoyed significant growth in recent years, despite periodic uncertainty.

 

For instance, the Imara Equity Fund has recorded one-year growth of 14.7%, three-year growth of 69.4% and five-year growth of 165.8% (for a 20.4% annualised gain).

 

Continued international nervousness about EMs is a concern, but Botha believes we have to "tough it out”.

 

He adds: "Negatives have positives attached. Our currency slides, but suddenly the earnings prospects of our blue-chip companies bounce back up. Most of them earn foreign currency as well as rands. When the rand dips, foreign earnings compensate.

 

"As a result, earnings per share growth projections of about 9% have recently doubled. Yet share prices are under pressure. For how long? When global sentiment turns positive, good companies feel the benefit … and so do the portfolios of tough-minded local investors.”