When not to heed the headlines
Concerns about the strength of the global recovery have dominated markets over the past year, with renewed worries about the sustainability of the US economic recovery and the sensitivity of China to a European recession leaving investors uncertain. Howev
Global equity markets extended the rally started in the fourth quarter of 2011 into the first quarter of 2012. In local currency terms, the MSCI All Country Index was up 11.12% for the quarter (and 6.24% in rands), while the SWIX Index rallied 7.49% (also in rands). Over twelve months, the MSCI All Country Index made just 0.74% when measured in local currency (but 12.64% when measured against a depreciating rand), compared to the 11.62% return of the SWIX.
The chart below describes the fortunes of several asset classes over the past 12 months. (For ease of comparison, all returns are shown in South African rands.)
(Click on image to enlarge)
ALSI performance – 1 January to 22 September 2011
Most of the quarter’s equity market gains took place in the month of January, where markets responded positively to better-than-expected economic news out of the US and China, as well as to some progress on a resolution to the Greek debt crisis. Once again, however, the uncertainty playing itself out in the global arena resulted in renewed equity market weakness during the months of February and March.
Nevertheless, those investors who were put off by seemingly erratic market behaviour and who cautiously remained invested in cash would have had a significant opportunity cost.
Commentators have referred to this schizophrenic behaviour of the market over the past year as risk-on/ risk-off trade. We can track this so-called “risk-on/ risk-off trade” by noting whether resource shares are outperforming (risk-on) or underperforming (risk-off) the general market.
As the chart below shows, resource shares have significantly underperformed the general market over the past 12 months (and by almost 50% since the onset of the financial crisis in 2008), despite two periods of positive performance over this time (shown by the upward sloping arrows in September and October last year, and January this year).
(Click on image to enlarge)
ALSI performance – 1 January to 22 September 2011
It is, of course, extremely difficult to time the purchase of resource shares, just as it difficult to time the entry or exit point from cash. Investors should therefore remain cautious of exposing their portfolios to a prominent macro-economic view, giving the difficulty of consistently getting this right.
A well-diversified, multi-managed process should reduce the risk of getting entry points into asset classes or sectors incorrect, and help to mitigate periods of underperformance. Multi managers are deliberate about not trying to time turning points in the interest rate cycle or basing investment decisions on when economic conditions will improve. Rather, they expect their appointed managers to follow their own investment processes and not to react to the latest headlines or news. The result should be a combination of managers that follow distinct processes, and more consistent risk-adjusted returns.
