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Investment views

Destroying value by chasing performance

10 August 2017

We are living in a challenging investment environment. Locally, we have much uncertainty in the near future while globally we have both low deposit rates and low government bond yields. Additionally, we have a global economic cycle that by historical standards is long in the tooth. As a result, no asset class looks set to be a clear winner going forward.

Investing in this environment is very difficult and although investors have recognised this change, they have not necessarily altered their investment decisions correctly. In this article we explore the returns investors have received in the past ten years; typical investor behaviour over this period, and highlight how this behaviour can destroy significant value – by chasing performance on asset classes one can forgo 55% when compared to an average balanced fund (over the 10 year period).

The easy decisions are behind us

For the last ten years, it mattered less which asset class you invested your money, as they all provided a real return, despite different to long term expectations. As can be seen in Figure 1, over an annualized ten-year period (ended 30 June 2017), every asset class outperformed inflation. However, over the last year (12 months to 30 June 2017), returns have struggled to beat inflation or cash.

Figure 1 – Asset class returns

Source: Morningstar to 30.06.17. Past performance is not an indicator of future performance. ASISA sectors used as a proxy for asset classes.

Furthermore, the South African equity market has gone sideways for the last three years, delivering returns less than cash. These returns came at the price of significant volatility, with an 18% range of returns during this period, as demonstrated in Figure 2.

Figure 2 – FTSE JSE All Share

Source: INet Bridge, to 30.06.17.

Hiding in cash

As a result of market volatility and the depressed return environment shown above, we have seen increasing flows into money market funds over the last 18 months. Additionally, there is a significant amount of money sitting on the side-lines, with retail bank deposits increasing to over R1 trillion in April 2017, from R700 billion two years ago.

Figure 3 – Rolling 12 month netflows into retail money market funds (Rm)

Source: ASISA to March 2017.

Destructive investor behaviour

Investors often chase performance, investing in asset classes, funds, strategies or managers based only on recent outperformance. This is partly evident in the move to cash and money market described above. However, this behaviour is often destructive and can lead to poor investment outcomes, which is more pronounced in volatile markets.

Table 1 below illustrates the annual return for each of the asset classes over the last 10 calendar years. As can be seen, no asset class has consistently outperformed every year (green denotes the year’s winner) and most asset classes have taken their turn at being the worst performing asset class (red) in a year.

Table 1 Annual return for each of the asset classes over the last 10 calendar years

Source: Morningstar to 30.06.17. Past performance is not an indicator of future performance. ASISA sectors used as a proxy for asset classes.

Chasing last year’s winner is likely to destroy value over time. This is evident using the following simple example.

Assume that an investor has a portfolio which invests in the best performing asset class of the previous year (called the “Chaser portfolio” below). Every year, for ten consecutive years, on the 1st of January, the investor switches into the best performing asset class of the previous year.

We compare this strategy to the underlying asset classes as well as a balanced fund. As can be seen from the chart below, the portfolio where the investor chases the best performing asset class from the previous year delivers the worst return. Even the worst performing asset class of the eight over the 10 year period outperformed the chaser portfolio by a cumulative 18.3% (or 1.1% p.a.). While this example is exaggerated, it highlights how destructive this behaviour can be. It is important to note, that the annual switch may also be subsequent to capital gains tax, reducing the after tax return.

Investec Opportunity, a balanced fund which makes use of all the underlying asset classes, delivered the second best performance over the 10 year period, of 9.4% p.a. This return is second only to SA Property, which has had a stellar run over the last 10 years. However, it is important to note that the performance of Investec Opportunity came at only 60% of the risk of SA property, as measured by volatility.

Figure 4 – Asset classes versus a chaser portfolio

Source: Morningstar to 30.06.17. Past performance is not an indicator of future performance. ASISA sectors used as a proxy for asset classes. For illustrative purposes only.

The same exercise can also be done where the investor picks the best performing fund, and switches into last year’s winner. We illustrate below using the ASISA High Equity sector, by switching into the best performing fund from the previous year in January each year. For an investment of R1 million made on 1 July 2007, the difference between the chaser portfolio and an investment in Investec Opportunity would be nearly R900 000 today (a difference of 4.8% p.a. over 10 years).

Figure 5 – Chasing performance in the High Equity Sector


Annualised performance (%) Investec Opportunity Fund ASISA South African MA High Equity
1 year 0.1 1.5
10 years p.a. 9.4 7.8

Morningstar as at 30.06.17, NAV based, (net of fees, excluding initial charges). Highest and lowest 12-m onth rolling performance since inception is 43.8% and -15.7% respectively. Past performance is not an indicator of future performance. For illustrative purposes only.

Staying the course

Both of these examples demonstrate that switching on the basis of past performance is value destroying. Removing emotion from investment decisions is especially difficult when dealing with your own money. In these uncertain times, it’s best to seek professional advice from a financial advisor.

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, up to 10% of fund net asset value to bridge insufficient liquidity, and scrip lending. 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 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).
Sector definitions
Global property (ASISA) Global RE General
Global bonds (ASISA) Global IB Variable Term
Global equities (ASISA) Global EQ General
Global money market (ASISA) Global IB Short Term
Local property (ASISA) South African RE General
Local bonds (ASISA) South African IB Variable Term
Local equities (ASISA) South African EQ General
Local money market (ASISA) South African IB Money Market

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