The investment gurus back equities this year – just!
Any time is a good time to review your investment portfolio. But in the event you’ve been neglecting your retirement planning the New Year offers a great opportunity to get back on top of things. Financial planners should certainly take advantage of the “
Dr Prieur du Plessis, chairman of Plexus Asset Management begins his 2010 review by reminding investors how far the MSCI Word (+31.2%) and MSCI Emerging Market (+17.1%) indexes still need to gain before they return to October 2007 highs. The disparity between the equity market recovery in developed and emerging markets is easily explained. “The US recovery has been somewhat subdued, with very little improvement in important drivers of economic growth – such as US unemployment and consumer spending,” says Du Plessis. “In addition the financial markets are dealing with the still-festering sovereign debt problems in the Euro-zone and other countries.” The statistics points to further potential for returns from equities as the world plays “catch up”.
Unpacking the 2010 investment decision
Plexus Asset Management has conducted extensive research into capital flows to and from local rand-denominated unit trust funds (excluding money-market funds) to paint a picture of the typical 2010 investment decision. Their conclusions are telling. Over the 12 months ended 31 December 2010 domestic funds experienced an inflow of R53.5 billion, 94% of the R56.9 billion total flows. Of this only R3.4 billion went to rand-denominated funds with offshore exposure. In other words – despite the numerous calls for offshore diversification – local investors prefer to keep their money at home...
R38.7 billion found its way to domestic asset allocation unit trusts. This suggests local investors prefer leaving the tough decisions on how much of their capital to allocate to cash, bonds, listed property and equities in the experts’ hands. Du Plessis decided to strip money market investments from the research; but we know from experience that local investors love “conservative” cash products. This tendency was confirmed by the R8.1 billion channelled to domestic fixed interest funds. Even though South Africa’s interest rate cycle is at rock bottom investors prefer the “safety” of cash and near cash products.
The trend is for these fixed interest funds to commit more and more of their capital to listed property to bolster returns. “I am somewhat concerned about the amount of money flowing into the real estate sector,” said Du Plessis. “Investors are basing their decisions on past performance, and I am not sure they understand the risks involved in listed property. In an environment of declining interest rates, property tends to do very well. But when the cycle turns and rates begin to rise, listed property can become as volatile as ordinary equities,” he said. The analysis also confirmed investors were reluctant to climb into equities during the June 2010 quarter – missing out on some of the best returns on offer.
What can we expect through 2011?
Du Plessis wasn’t making too many predictions. He reckons investors should learn not to waste time staring into the proverbial crystal ball, and rather concentrate on the facts and buying when value is staring them in the face. From the research I’ve read we’ll probably see the 2010 asset class returns mirrored through 2011. This means your best returns will probably be from equities, followed by listed property (noting the interest rate concerns expressed earlier), bonds and cash. Thus far the consensus is for interest rates to remain largely unchanged through 2011 – so I only expect the trepidation around real estate-linked investment to exhibit in the final quarter.
Paul Steward, MD of Plexus Asset Management largely backs this assessment in his recent 2011 outlook. He said investors could suffer some capital losses as bond yields drift outwards. You can expect an unexciting but positive real return from SA bonds this year. Listed property will probably only show a small positive real return, in the region of 3% to 4%! But he’s less upbeat about equities. “Equities at an overall index level, in almost all markets, are not cheap,” said Steward. “They have traded at above-average historical earnings multiples since the bottom of the credit crisis and the strong recovery in corporate earnings has lifted prices simultaneously, meaning valuations have not improved perceptibly.” It looks like careful stock selection will be required to ensure decent equity market returns this year.
Editor’s thoughts: The fund managers love the fact local investors favour asset allocation funds. And all else being equal it makes sense to let the professionals decide how cash gets split between the major classes (cash, bonds, listed property and equity)… Do you prefer placing your client’s cash in asset allocation funds, or are you making these decisions with your client, and then picking a sensible basket of products to achieve the same thing? Add your comment below, or send it to [email protected]
