Surviving the short term to thrive longer term

The current challenge facing many long-term investors is to simply survive the shorter-term market disappointments to benefit from the return premium offered by growth assets over the longer term.

For many investors, the last five years have been traumatic. Domestic woes and instability in global markets have resulted in muted returns across almost all asset classes.


Figure 1: A range of factors have led to disappointing returns

Source: Investec Asset Management.

While global assets have outperformed local assets, this outperformance is mostly due to rand depreciation, as evidenced in Figure 2. Over the five years to the end of October 2019, the rand has depreciated by as much as 7% per annum against the US dollar, thereby making up the bulk of the rand return for global cash and bonds and more than half the return for global equities.


Figure 2: Five-year annualised returns in rands to 31 October 2019

Market returns have proven a significant challenge for people drawing an income

A lack of retirement savings and depressed investment markets have left many pensioners anxious about the future. Jaco van Tonder, Advisor Services Director, has explored the challenges facing retirees as part of Investec Asset Management’s in-house research study into “How investors should approach living annuities”.1

Jaco makes the point that even though the principle of “beating inflation requires exposure to equities” is widely accepted by investment professionals, it is easy to overlook this principle in situations where an investment portfolio is required to produce an income. Jaco also makes two conclusions that are relevant to this article:

  1. Living annuities require meaningful equity exposures to enable the annuity’s income levels to keep pace with inflation.
  2. Fixed income portfolios are unable, on their own, to produce the returns required to keep pace with inflation.

Investing in the wrong asset class is costly in the long term

Despondent investors have increasingly sought refuge in fixed income investments, thereby potentially compromising their long-term investment goals. This behavior is even true for conservative investors who had previously invested in multi-asset low equity funds (i.e. lower risk funds that target inflation beating returns over rolling three-plus years), such as the Investec Cautious Managed Fund.

For long-term investors, however, investing in the wrong asset class can prove costly. The South African Savings Institute (SASI) makes the point that while in the short-term cash and bonds may be somewhat safer, in the longer term they provide less protection against inflation and therefore are unlikely to maintain real buying power.


1 – A new approach to living annuities:

Furthermore, tax considerations generally accentuate this outcome. SASI’s analysis suggests that over time, the four domestic asset classes are likely to produce the following real (after inflation) returns in the long run:2

• Cash: 0 to 1%

• Bonds: 1 to 3%

• Property: 2 to 4%

• Equities: 7 to 9%

It is also important to note that with inflation well within the target range and developed market interest rates at all-time lows, interest rates in South Africa are likely to trend downwards. The attractive real returns offered by money market and other flexible fixed income investments are therefore likely to come under pressure as a result. At the same time, we are now far more optimistic on the prospects for growth assets to deliver inflation-beating returns in the future.


Targeting consistent real returns to conservatively grow your savings

We therefore continue to argue that conservative investors should reconsider the important role that multi-asset low equity funds can play in their portfolio. These funds offer a bias to income-generating assets, while maintaining a growth element.

The Investec Cautious Managed Fund, for example, is suitable for conservative investors saving for retirement and for retirees drawing an income from a living annuity. The fund is well-positioned to meet these needs, thanks to its broad investment opportunity set that allows for investment in assets that offer growth and income, and a strong emphasis on capital preservation. As a result, the Investec Cautious Managed Fund has delivered a positive real return over rolling three-year periods 80% of the time, as shown in Figure 3.


Figure 3: Growing investor capital in real terms

A key strength of the fund is its ability to exploit the changing investment opportunity set. Historically, multi-asset funds have looked to South African equities as the primary driver of real returns and offshore bonds as the uncorrelated defensive asset. However, we believe that offshore equities are now the best opportunity for growth, with South African bonds offering attractive risk-adjusted returns, as well as helping to counterbalance risk in the portfolio.


This view is reflected in the next two charts. Figure 4 shows the changing asset allocation of the Investec Cautious Managed Fund over time, while Figure 5 depicts the Quality capability’s range of expected returns over the next five years from the different assets held in our Quality portfolios, including the Investec Cautious Managed Fund.


Figure 4: Investec Cautious Managed Fund asset allocation since 2006

Figure 5: Range of expected annualised returns for current Investec Cautious Managed Fund holdings (in rands)

In conclusion

In today’s uncertain investment environment, asset allocation and stock selection are key. Conservative investors should consider entrusting a portion of their investments to the experienced, well-resourced and globally integrated portfolio management team who manages the Investec Cautious Managed Fund. To quote, Duane Cable, Investec Cautious Managed Fund Portfolio Manager: “In the volatile world in which we find ourselves, it has become increasingly apparent that one needs to have a global perspective to navigate the choppy waters of investment markets”.

Important information

All information provided is product related and is not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security. Collective investment scheme funds are generally medium to long term investments and the manager, Investec Fund Managers SA (RF) (Pty) Ltd, gives no guarantee with respect to the capital or the return of the fund. Past performance is not necessarily a guide to future performance. The value of participatory interests (units) may go down as well as up. Funds are traded at ruling prices and can engage in borrowing and scrip lending. The fund may borrow up to 10% of its market value to bridge insufficient liquidity. A schedule of charges, fees and advisor fees is available on request from the manager which is registered under the Collective Investment Schemes Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Performance shown is that of the fund and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. There are different fee classes of units on the fund and the information presented is for the most expensive class. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where the fund invests in the units of foreign collective investment schemes, these may levy additional charges which are included in the relevant Total Expense Ratio (TER). A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The ratio does not include transaction costs. The TER of the Investec Cautious Managed Fund (A) class is 1.73%. The current TER cannot be regarded as an indication of the future TERs. Additional information on the funds may be obtained, free of charge, at The Manager, PO Box 1655, Cape Town, 8000, Tel: 0860 500 100. The scheme trustee is FirstRand Bank Limited, PO Box 7713, Johannesburg, 2000, Tel: (011) 282 1808. Investec Asset Management (Pty) Ltd (“Investec”) is an authorised financial services provider and a member of the Association for Savings and Investment SA (ASISA). This document is the copyright of Investec and its contents may not be re-used without Investec’s prior permission. Investec Asset Management (Pty) Ltd is an authorised financial services provider. Issued, December 2019.

Should I move my investments offshore?

Given the challenges the South African economy is facing and the underperformance of local risk assets relative to its global peers, one can appreciate why some investors are considering investing the bulk of their wealth in offshore assets. As the saying goes, discretion is the better part of valour, and investors would do well to remember to be cautious when making big changes to their investment portfolio(s).

Although times are tough and confidence is low, investors must remember to remain focused on the fundamentals and not be led by emotion. Fear and panic can force us as investors into making mistakes with our money. Buying quality assets at discounted prices not only gives investors the best chance of achieving superior returns in the long run but also offers a margin of safety, which is critical from a risk control point of view.


When we think about returns from a total return perspective, we believe total returns arise from three components:

  1. Growth (i.e. growth in the earnings potential of the asset in question)
  2. Yield (i.e. the cash flows – such as the dividends you receive – relative to the price of the asset)
  3. Ratings change (the change in valuation i.e. the price appreciation/depreciation of the asset in question.)


When taking a closer look at the current return prospects of local and offshore assets, there is a range of factors to take into consideration from a valuation perspective.


On the global front, current yields for global assets are less compelling, in part due to asset prices being on the high side. These high prices (relative to historical prices) would suggest that, over time, the prices of these assets will move back to the mean (i.e. the average price). If investors were to buy in at current prices and the prices reverted to the mean, it would lead to investors losing value.


To be clear, we are not suggesting that a collapse in asset prices is imminent or is the next sequential step for global assets. Instead, we acknowledge the possibility that asset prices could rally further (i.e. become more expensive), which in our view, incrementally adds to the risk of capital loss.


Careful consideration needs to be given to risks that arise from having exposure to different geographies when you invest offshore. These risks range from currency to asset and liability mismatches. For instance, the currency tailwind that one enjoys when the rand weakens can easily be a headwind when the rand strengthens. Currency risk is significant and unpredictable when one considers the volatile nature of exchange rates. We remind investors that the rand can strengthen in the absence of positive local developments. The rand can easily appreciate on the relative weakness of major currencies, i.e. non-South African specific reasons. Risk should, therefore, be continuously monitored and managed.


Local asset prices have conservative growth estimates. The yield component is attractive owing to compelling dividend yields on the back of depressed asset prices. Further to this, there is potential for a reversionary re-rating to current multiples which could further enhance returns. But what of the dire situation the local economy finds itself in? How will companies grow earnings when there is a clear lack of demand and pricing power in the local economy?


A struggling economy does not necessarily equate to bad investment outcomes. Even in tough economies, there are well-run businesses that can maintain and grow profits. Some local businesses are well-diversified geographically in terms of both revenue and operations, which gives them exposure to offshore earnings streams and makes them less reliant on local macro conditions.


With that said, it’s also important to acknowledge that there will be losers amongst local businesses as some will struggle to cope with the macro-economic backdrop. The current scenario presents an opportunity for superior performance – for investors that are willing to discover and exploit good investment opportunities as well as tolerate the discomfort and stay the course.


It is especially during times like these that investors are faced with emotional and behavioural challenges on their investment journey. One of these challenges is dealing with and separating their emotions when it comes to making decisions about their investments. Most investors are, with good and admirable reason, emotionally invested in the affairs of our country, sometimes to the detriment of their investment decision making. They often fail to recognise good investment opportunities, due to the negativity surrounding the current status quo. We all need to strive to make rational decisions based on sound principles and facts, and not emotions if we are to increase our odds of investing successfully.


We urge investors to take a holistic approach when it comes to investing, i.e. to adopt a total portfolio approach to investing in order to diversify and minimize investment risk. Investors should strive for broad diversification and carefully assess the risk and reward characteristics that competing assets introduce to their investment portfolios.


While we see opportunities in select S.A. asset classes, in our regulation 28 compliant portfolios, we remain close to fully invested in global equities as part of our overall portfolio construction process to maximise the reward for risk.


Both local and offshore investments have their pros and cons. This is why it is important to have a well-diversified portfolio that will protect and grow your investments in a variety of different market conditions. Going forward, it would be advisable to place more focus on expected future returns and risk management. Investors must focus on remaining patient, staying the course and avoid making investment decisions in a panic.


At Morningstar, we continue to follow a valuation driven approach when allocating capital. This includes taking a holistic approach to portfolio construction, by allocating to unloved and cheap assets with a wide margin of safety. It is often during times when these assets are completely out of favour that the best opportunities for future returns present themselves.

Simbarashe Mangwiro

Associate Investment Analyst, Morningstar Investment Management South Africa

Risk Warnings
This commentary does not constitute investment, legal, tax or other advice and is supplied for information purposes only. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. The information, data, analyses, and opinions presented herein are provided as of the date written and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar Investment Management South Africa (Pty) Ltd makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be superseded by any subsequent versions of this commentary. Except as otherwise required by law, Morningstar Investment Management South Africa (Pty) Ltd shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use.

This document may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

Morningstar Investment Management South Africa Disclosure

The Morningstar Investment Management group comprises Morningstar Inc.’s registered entities worldwide, including South Africa. Morningstar Investment Management South Africa (Pty) Ltd is an authorised financial services provider (FSP 45679) regulated by the Financial Sector Conduct Authority and is the entity providing the advisory/discretionary management services.