Value destroyed again by cut-and-run investors

Investment value has been destroyed again by unit trust-holders that picked one of the lowest points of the year to exit the equity market.

Recent potentially wealth-depleting behaviour by retail investors has been highlighted by STANLIB as a possible signal that a JSE recovery may not be too far away.

The country’s largest unit trust company points out that cynics often identify a market bottom by the sudden exit of unsophisticated investors and regard strong equity inflows by Joe Public as an indication that a peak has been reached.

The bottom end of that scenario may recently have played out.

Paul Hansen (pictured), STANLIB’s director of retail investing, notes: “Our advice in recent weeks was to sit tight and exploit value opportunities as some share prices were looking extremely attractive.

“Sadly, since late June and early July we have witnessed steady net outflows from funds across the board, including general equity, asset allocation, property and small cap unit trusts.

“It is beginning to look as though this occurred close to the bottom in some sectors. In other words, ordinary investors took losses of perhaps 30% or more when a market upturn was not too far away.”

He said it was understandable that confidence fell to a low ebb during recent market weakness, but “buying high and selling low does not build wealth”.

Between October and the end of June, the banking index fell by 40%, down from 36 000 points to 25 700. Between November and early July, listed property was down 38%. The value of some industrial shares fell by up to 40% over a similar period.

Hansen acknowledged it was too early to call a bottom, especially as banking shares had flattered to deceive as recently as February.

“However, after a dramatic slide between February and mid-year we saw a gain of 22% by our banks in the four weeks to the end of July,” Hansen added. “We then saw signs of some profit-taking, but the underlying feeling was that financial shares had seen the worst.

“The annoying thing from the perspective of the small South African investor is the suspicion that some foreign investors spotted the value opportunity in late June, bought in, benefited from a 5% strengthening of the rand in July and took a 25% profit at month-end.”

It hardly took an investment guru to identify value.

Local banking counters were at historically low price-to-earnings ratios at the same time that dividend yields were at a 20-year high.

Foreigners would also have been quick to spot that the balance sheets of South African banks were under no discernible threat from the northern hemisphere’s sub-prime debacle.

“We had a situation where international banking sector contagion spread to a local market and depressed sentiment when local factors were quite robust,” said Hansen. “Negative sentiment was overdone. Intrinsic value was not in doubt.

“Unfortunately, the average investor is sensitive to prevailing sentiment and is usually less perceptive on technical matters. That’s why there is always a danger that the ordinary investor-saver will join a stampede for the exits at the wrong time.”

The average investor does not need to transform himself into a market expert to guard against destructive behaviour like this.

“Just tell yourself you can’t time the market,” advised Hansen. “What you can do is diversify your holdings so you are not over-exposed to equities or any one asset class.

“You can then ride out short-term volatility. Sitting tight may seem passive, but it makes more sense than a mistimed exit.”