What a year 2020 has been so far! The effect of the Covid-19 pandemic on South African economic growth has been severe and markets around the globe continue to be volatile, not only as a result of the pandemic but also due to investor sentiment and political issues.
So how do investors navigate these times? The starting point should be to sit down with your client and establish whether their circumstances have changed and, if so, whether their existing portfolio still meets their requirements. Then, it’s also worth ensuring that the investment manager appointed to run the portfolio is actively doing so.
The world has been through severe pandemics, US presidential elections, recessions and market volatility before. Markets go through cycles and we don’t know how long or severe the current crisis will be. But we do know that you should highlight the importance of continuing to save and staying invested so that clients can still meet their financial obligations and achieve their long-term financial goals.
Markets go through cycles and we don’t know how long or severe the current crisis will be.
If portfolios delivered disappointing returns, it’s worthwhile understanding what has driven these returns. Don’t sell out just because you see another portfolio doing better. History has taught us that selecting funds based on short-term past performance is dangerous and invariably leads to poorer outcomes.
Ensure that you are comparing like with like. What asset classes are the portfolios invested in? Do they have similar offshore exposures? How do they compare to the peer group average over the longer term? And engage with the portfolio manager to understand what they are doing to position the portfolio for the future.
The unit trust statistics continue to show a trend towards de-risking as investors continue to lose faith in the more aggressive funds being able to deliver on their performance expectations. The problem with exiting after poor returns is that you lock in those losses. Investors that are prepared to wait for a future recovery may not only make back these losses but potentially have some gains.
You should also consider the other costs of disinvesting and switching. Your client may still incur capital gains tax, and there is the opportunity cost of being out of the market when the recovery starts. People wait for confirmation of recovery before committing. So, investors who exit portfolios after a market downturn and only enter again after the recovery is confirmed, lose out on both sides of the investing cycle.
While those that remain invested will experience the shorter-term volatility, our statistics show that they are invariably compensated for staying in the market.
True diversification requires investments in several asset classes and there is a very strong argument for South African investors to have a portion of their assets invested in offshore markets. The amount again depends on your client’s personal circumstances and risk appetite.
At Momentum Investment Consulting, we believe it is as important to learn from our past, as it is to consider the positioning of our portfolios for the future. We spend time investigating the current market and trying to determine which changes are structural versus those that are cyclical.
We spend time investigating the current market and trying to determine which changes are structural versus those that are cyclical.
In a low-return uncertain environment, being in a diversified portfolio isn’t enough. It’s important to look deeper to gain an understanding of the drivers of return given the current interest rates and growth expectations.
It’s also important to understand that real returns don’t come in a straight line and to be realistic about the real return expectations. Over the short term, real returns are unlikely to be as high as we have seen before, but by having exposure to quality assets which tend to be more resilient, we believe there are enough opportunities out there to deliver on our clients’ longer-term objectives.